Traditional Vs. Contemporary Management Accounting .
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4, No.4, October 2014, pp. 104–125E-ISSN: 2225-8329, P-ISSN: 2308-0337 2014 HRMARSwww.hrmars.comTraditional Vs. Contemporary Management Accounting Practices andits Role and Usage across Business Life Cycle Stages: Evidence fromPakistani Financial SectorKhurram ASHFAQ1Sohail YOUNAS2Muhammad USMAN3Zahid HANIF41Government College University Faisalabad, Pakistan,1E-mail: khurram.ashfaq@gcuf.edu.pk2Department of Commerce, University of the Punjab Gujranwala Campus, Pakistan,2E-mail: sohailg59@gmail.com3Lahore Leads University Lahore, Pakistan44University of Sargodha, Pakistan, E-mail: Zahid pugc@yahoo.comAbstractKey wordsThe research examines the management accounting practices and its level of usage in servicessector of Pakistan. For this purpose, banking companies, Insurance companies, Telecommunicationcompanies and Computer Service companies were selected. The data was collected throughadapted questionnaire regarding management accounting practices and its level of usage. Therewere 90 target listed services companies from service industry where data has been collected. Theunit of analysis was company and the responses were analyzed through descriptive statistics.Findings with regard life cycle stages, there are 69% respondents companies belong from growthstage and 24.4% are located in maturity stage. The results indicate that management accountingpractices for instance costing practices; budgeting practices & decision making practices are widelyused especially traditional management accounting practices in service sector of Pakistan. While interms of performance evaluation practices, all the non financial measures related to employees,customers and operation or innovation have lower level of usage in service sector of Pakistanirrespective of the business life cycle stage. Moreover, the results reveal that financial companieswhich are sub sector of service sector are more sophisticated by utilizing management accountingpractices but other services companies do not much utilize management accounting practices fromfinancial sector of Pakistan. These results imply that management accounting practices are morecomplicated as the companies move from growth to maturity stage. In addition, traditionalmanagement accounting practices still have the highest level in financial sector of Pakistan basedon its importance & usage.Management accounting practices role & usage, life cycle stages, services sector, PakistanDOI: 10.6007/IJARAFMS/v4-i4/1285URL: http://dx.doi.org/10.6007/IJARAFMS/v4-i4/12851. IntroductionIn current era of business environment there is a lot of competition in business and corporateworld in developed as well as developing countries. The owners of corporations want to go not only up tothe mark but also to achieve higher position in the market of their corporations in every aspect of thebusiness (Sleihat et al., 2012). So the responsibilities of the directors going to increase in organizations,especially Management accounting tasks are very important to control cost, productivity and pricingdecisions in an organization (Jhonsan and Kaplan, 1987). Management accounting practices (MAP) arevery essential to success for the organization and these practices have been used in traditional way in
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4 (4), pp. 104–125, 2014 HRMARSorganization (Horngren et al., 2009). Management Accounting Practices (MAP) includes cost practices,budgeting, and information for decision making, strategic analysis and performance analysis. Thesepractices are using by manufacturing companies and make plans to control cost in different way byutilizing these accounting techniques. There is the need for organizations to get success in the dynamicmarket (Horngern et al., 2009).Management accounting is the production of very long experiences and techniques of thebusinesses and managers of the organization that are used information especially financial informationabout their firms for decision making that provided them a competitive edge to the firms. About 190years ago when the industrial revolution took place, the management accounting develop and had theimportance in USA and other countries of the world. In the result of industrial revolution the productionof the products for instance, textile products had been increased, so the need of some costing, controllingand planning related information were also increased. A railway company made the geographically trackof railway and determine the costs and did the planning and the birth of management accounting occurat those time. Andrew Carnegie used the costs sheet at the end of nineteenth century when hedetermines the costs of steel products. In this way management accounting was taken into account bythe different organizations. At the starting of the twentieth century remarkable advancement inmanagement accounting was taken when Du Pont return on investment management accounting modelintroduced. In this way management accounting became itself a well established and mature businessdiscipline (Chandler, 1977; Johnson and Kaplan, 1987).In different years management accounting evaluation took place as follows:During the year of 1950:Focus on the valuation of cost and its determinants along with some budgeting techniques andtechnology.During the year of 1965:The concept of responsibility accounting and information for management and control by usingdifferent sort of technologies were considered.During the year of 1985:Focus on the reduction of the wastage of the resources by using different cost and managementaccounting techniques.During the year of 1995:A big change had been occurred during this period in which the following concepts were inpractice: value creation, effective use of resources, determined the drivers of value, shareholders valueand information technology.During the year of 2000:The concept of supply chain management with reduction of distribution cost and controllinginventories were famous (Mohammad Talha, 2010).According to the Ferreira, (2002) management accounting tools and techniques previously andcurrently used are as follows:Table 1. management accounting tools and techniquesPrevious Management accounting techniquesBreak even salesStrategic planningBudgetingDeviation analysis of budgetProduct costingProduct profitabilityTableau de bordReturn on Investment (ROI)Contemporary Management accounting techniquesBalanced scorecardActivity based budgetingActivity based costingTarget costingProfitability analysis about customerEconomic value additionLife cycle of product and its costingBenchmarkingBack flush costingConstrains theoryKaizen approach costing105
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4 (4), pp. 104–125, 2014 HRMARSIn an organization, effective decision making required accurate information which includesaccounting information. Due to the inadequacy of such information the decision making in theorganization is not up to the mark (Pollard, 1965; Solomons, 1952; Yamey, 1962). Managementaccounting has some techniques and tools that are used in the world in different way. These techniquesare costing, budgeting, decision making, performance analysis and relevant costing etc.There is evidence that accounting study and practice have reasonable gap between them. It is alsoconsiderable that this gap is not on the basis of development of accounting as academic but due to thelack of research in accounting and specially management accounting (Inanga & Schneider, 2005). Incurrent era of business environment there is a lot of competition in business and corporate world indeveloped as well as developing countries. The owners of corporations want to go not only up to themark but also to achieve higher position in the market of their corporations in every aspect of thebusiness (Sleihat et al., 2012). So the responsibilities of the directors going to increase in organizations,especially Management accounting tasks are very important to control cost, productivity and pricingdecisions in an organization (Jhonsan & Kaplan 1987). Management accounting practices (MAP) are veryessential to success for the organization and these practices have been used in traditional way inorganization (Horngren et al., 2009). Recently in developing countries there is wide use of Managementaccounting practices in manufacturing and industrial sectors as compared to financial sector (Philmoreand Diana, 2011). Management accounting practices are varied and rapidly used in differentorganizations. But the most usable MAP is budgeting, reporting, costing and variance analysis (France,2010).1.2. Problem statementManagement accounting practices MAP are studied with current status of them and life cycle ofthe organizations from the selected sample of research. The broad problem statement is:Management accounting practices, its role, extent of usage and the level of these practices inservices sector of Pakistan.1.3 Research QuestionsFrom the research studies the following are the research questions of this study.1. Presently, what is the role of management accounting practices in services sector of Pakistan?2. How much the level of usage of management accounting practices in services sector of Pakistan?3. What are the levels of management accounting practices in services sector of Pakistan?1.4 Objectives of the study1. To evaluate the management accounting practices (MAP) that has been used in service sector ofPakistan.2. To evaluate how much the levels of these management accounting practices (MAP).3. To evaluate life cycle of the organizations and management accounting practices (MAP).1.5 Significance of the studyThere is lack of research in services sector of management accounting practices in developingcountries of the world. It may be due to the shortage of knowledge of management accounting practicesin this sector. Therefore, there is a need of research on management accounting practices in developingcountries (Sleihat, 2012). The usage of IFAC model (IFAC, 1998) to identifying the level of sophistication ofmanagement accounting practices in services sector has not been conducted frequently, so there is a gapin this sector (Sleihat, 2012). This model has already been used by the two researchers (Kader and Luther,2006: Adelegan, 2000) in their studies in manufacturing firms. IFAC model will be used in this research forunderstanding the sophistication level of MAP (Abdel-Kader, 2006; Adelegan, 2000).Services sector is the growing sector of the world’s economy. In Pakistan this sector is also growingday by day. The management accounting practices which are used in services sector make the part of its106
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4 (4), pp. 104–125, 2014 HRMARSconstant and rapid growth of this industry. According to economic survey (2013) of Pakistan, servicessector of Pakistan growing rapidly with enhancement in shares and dominating position in the economyof Pakistan and has the part of the share in GDP in Pakistan of 57.7% in total GDP. Services sector ofPakistan is the main driver of economy of Pakistan (Pakistan economic survey, 2013). So the study in thissector about management accounting practices is very important and will contribute of techniques whichwere used by these firms to enhance its growth as well.2. Literature ReviewTriest and Elshahat, (2007) said that there is gap in the research of management accountingpractices in eastern countries of the world. And that’s why there is the limited used of managementaccounting in these countries. The example coded by the same researchers of Egypt in whichmanagement accounting were used only for introductory level and not in advanced level (Triest, 2007).The major management accounting practices are Costing, Budgeting, and Decision making andperformance evaluation (Abdel- Kader & Luther, 2008).2.1. Costing PracticesAccording to Harris and Durden, (2012) there are main two types of costing. One is activity basecosting (ABC) and the second is inter organizational cost management. Due to the rapid change in thebusiness environments the use of activity based costing, just in time, total quality management tools havebeen emerged in the organizations. In 1980, ABC concepts emerged in the businesses and in 1990 thisconcept was used as to control costs in an efficient way. But still ABC is not in rapid used by theorganizations of the world (Abdel-Kader & Luther 2008). Another concept of costing is the target costingand kaizen approaches which are the renowned nowadays. These techniques are used to reduce the costsof the product during processes and product design and their results are the continuous improvements inthe firms. Due to this production costs, budgeting planning etc are more effective for the organization(Monden, 1993). According to Abdel-Kader and Luther, (2008) the following are the main tools for costingsystem:1. Fixed and variable costs;2. Overhead rates on the basis of plant and department;3. Learning curve;4. Cost of quality;5. Target costing;6. Activity based costing.Several studies have been supported that target costing and activity base costing are the two maintechniques for organizations to create benefits for the firms as a whole. Through these practices decisionmaking for management becomes easy and more accurate in an organization (Islam and Kantor, 2005).Sleihat, et al. (2012) summarized costing practices in their sample of study. Their results indicate that theseparation of fixed cost and variable costs are the mostly used. In the study the average score of thiscosting practice was 2.92 and 39.1% were often used and 21.9% of respondent companies weremoderate in usage of this costing practice. The study also revealed that Activity base costing was thelowest in usage in sample companies of their study. This evidence shows that mostly there are traditionalmanagement accountings practices have been used in their sample companies.Another view of importance of these practices the study gave the results that the target costingpractice is the highly important which score was 2.23 on average and 68.8% of the respondent companieswere gave the importance. The utilization of overhead rate in terms of plant was the second importantvariable and mean score 1.91 (Sleihat, et al. 2012). According to Abdel-Kader and Luther, (2006) thecosting practices especially separation of fixed and variable cost were used in large instead of activitybased costing, marginal costing or absorption costs in British food and drinks industries. However theemerging costing techniques are target costing and cost of quality etc. their result showed that 48% ofthe respondent companies used fixed and variable costs separate for decision making. 83% from samplegave the importance or moderate importance to separation of this cost. Activity based costing were not107
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4 (4), pp. 104–125, 2014 HRMARSused by the firms frequently. About 76% firms rarely or very rarely used ABC. Cost of quality is importantbut this practice was not calculated in the firms frequently (Abdel-Kader & Luther, 2006).2.2. Budgeting PracticesBudgeting is the very important tool for controlling and forecasting all the activities of theorganization. Budgeting includes the rational allocations of organizational resources for achieving theorganizational goals and overall objectives. There are a lot of budgeting techniques such as activity basedbudgeting and activity based costing (Drury, et al. 1993). The primary objective of budget is to collect allthe costs for example material, labor etc within the organization. Activity based budgeting gives us a trueand precise picture of the costs allocations in the organization. Budgeting process contains the differentsort of budgets like master budget, cash budget etc. Cash budget includes the receipts and payments ofcash and opening and ending cash position of the organization, whereas the master budget includes theentire summary of firm’s activities. In the wide range of budgeting, the following practices are belongingfrom budgeting:1. Planning purposes budgeting;2. for controlling cost budgeting;3. for strategic planning;4. Flexible budgeting;5. Activity based budgeting (ABB);6. Zero based budgeting. (Abdel-Kader and Luther, 2008)Budgeting information has not for everyone because it is an internal document for the company. Itmay be utilized by the managers of the firms as well as the subordinates of the managers within theorganization. The users of the budget are as follows:Table 2. The users of the budgetPrimary usesSecondary usesTertiary usesQuantifying about:Resource usageGeneration of the incomesResource procurementQuantifying about:Payment to the resourcesCash collectionsCommunicate to the people about firm’s goalsNegotiation to the peopleBase of communicationReward and pay systemsSource: Huge, et al. 2005: 104A study conducted by Angelakis et al. (2010) with the title of adoption and benefits of managementaccounting practices: Evidence from Greece and Finland that budgeting practices in Greece are widelyused in which budgeting for financial position’s planning, budgeting for coordination of activities inbusiness, cash flow budgeting and for performance evaluation budgeting are very important. There were98% of respondent companies using these practices in Greece. In Finland these budgeting practices arealso used by the respondent companies (George, et al. 2010). Budgeting practices such as budgeting forplanning, budgeting for controllable cost, activity based budgeting and zero based budgeting are used inJordan financial sector. According to the Sleihat, et al. (2012) there is 78.1% of respondents from financialsector of Jordan used budgeting for planning technique which was the highest budgeting practice used inthis country by the financial sector. 76.5% of the respondents companies are using budgeting forcontrollable cost which is the second highest budgeting practice used by the financial companies ofJordan. Activity based budgeting are 40.7% companies from the sample using this budgeting practice andfinally 1.6% respondent companies are using zero based budgeting technique in financial sector of Jordan.The study also showed that traditional budgeting practices are still widely used instead of modernbudgeting practices such as Activity based budgeting etc.108
International Journal of Academic Research in Accounting, Finance and Management SciencesVol. 4 (4), pp. 104–125, 2014 HRMARSWith the context of importance of budgeting practices the study revealed that budgeting forplanning was the great importance in the sample companies and regarding importance, 70.3% from therespondent companies gave the importance. Budgeting for controlling cost was the second in rankregarding importance which contained 62.5% from sample companies gave the importance to thistechnique of budgeting. Strategic budgeting or for long term planning the study shows that 59.4% ofcompanies gave the importance to this technique of budgeting from given sample of study. Zero basedbudgeting tools had not the importance in this regard and sample companies gave the lowest importanceto this budgeting technique (Nimer, et al. 2012).2.3. Decision making PracticesGenerally, there is a perception about management accounting that its information provides themanagers for effective decision making. There are a lot of different tools for decision making in whichproduct profitability analysis, cost volume profit etc. Cost volume profit includes the potential change inthe revenues, costs and prices of the company (Horngren, et al. 2009). Decision making practices are asfollows:1. Profitability analy
Management Accounting Practices (MAP) includes cost practices, budgeting, and information for decision making, strategic analysis and performance analysis. These practices are using by manufacturing companies and make plans to control cost in diffe
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