Discuss about the Impact of Management Accounting Practices on UK’s Manufacturing Companies’ Financial Performance.
Malmi & Granlund, (2009) has opined that the accounting techniques are used by the business organizations to efficiently assess their operations. The techniques that prove to be beneficial include the variance analysis, budgeting, and break even analysis. So, accounting techniques proves to be beneficial for the business organizations to efficiently plan, direct and control their operating costs and achieve profitability. It has been advocated by Zimmerman & Yahya-Zadeh, (2011) that Management Accounting can be referred to as a set of techniques and practices that facilitate the managers with all the financial information necessary for making decision and maintaining an effective control over the corporate resources. Advocating the advantages of Management Accounting practices, Giovannoni et al., (2011) proposed the fact that the management accounting practices assist the organizations to survive in the dynamic and highly competitive business environment. Thus, on the basis of the above aspects, it can be inferred that there has been a significant change in the basic principles of management accounting and thus has emerged as a superior practice that adds significant value to the various organizational practices. It has been advocated by Ramljak & Rogosic, (2012) that the practices like marginal costing and absorption costing are not favoured by the businesses organizations since the costing systems are characterized with certain limitations and they do provide an accurate method of recording the costs that is important for managerial decision making. So, in comparison, the Management Accounting Practices enable the organization to obtain relevant information that contributes to effective decision making.
Thus, on the basis of the above aspects, the researcher in the present study has emphasized analyzing the impact of Management Accounting Practices on the financial performance of the firms. This would prove to be beneficial in analyzing whether the changes in the management accounting practices have proved to be beneficial for the form or not.
Ahmad, (2013) has opined the fact that the contemporary business environment has become highly competitive and as a result the business organizations have become highly dynamic and aggressive to identify the strategies that can ensure them a profitable existence. Competition in the business environment has been driven by rapid technological advancements, globalization, innovation and changing customers’ demands. Thus, these factors are driving the management of the business organization to design business strategies and techniques for guiding the organization towards achieving maximized profits that can be achieved by increasing sales and minimizing the production costs. Profit optimization and cost minimization can assist the business to achieve competitive advantage within the industry (Hopper et al., 2009). Thus, in this context it can be said that there are certain management accounting practices that can facilitate the management with strategies for influencing a large number of customers to have positive impression towards the brand and have lasting preference for the products and services of the business.
From the study conducted by Sunarni, (2013), it can be said that the management accounting practices in the recent time has undergone significant evolutions to take active participation in the strategic planning process of the business organizations. It has also been argued by Macintosh & Quattrone, (2010) that contemporary business organizations are efficiently applying the management accounting skills in cases where market intelligence is needed and strategic decisions need to be taken and competitive strategies need to be adopted and implemented. So, on the basis of the above arguments, it can be said that management accounting assist the firm in achieving competitive advantage in the ever demanding high competitive business environment that demand innovative management accounting practices. Moreover, it has also been opined by McLellan & Sherine, (2013) that the above measures in context to management accounting practices are deemed important especially in context to the manufacturing businesses where the firms embark upon efficiency and cost effectiveness as a competitive for achieving profitability and growth.
The above arguments motivated the researcher to take upon the study to analyze the impact of management accounting practices on the financial performance of the forms operating in the UK manufacturing sector.
In addition to the above aspects, the motivation on the part of the researcher to take upon the study can also be attributed to the personal interest of the researcher in the field of Accounting and Financial Management. The areas of Accounting and Financial Management especially in context to highly dynamic, competitive and ever changing business environment has been a part of the passion of the researcher during his academic years.
Research Aim and Objectives
The researcher in the present study has emphasized on investigating the impact of management accounting practices on the financial performance of the business organization operating in the UK manufacturing sector. Thus the study would emphasize on successful achievement of the following research objectives:
- To analyze the management accounting practices adopted by the firms operating in the UK manufacturing sector.
- To examine the impact of management accounting practices on the financial performance of the firms operating in the manufacturing sector in UK.
- What management accounting practices have been adopted by the firms operating in the UK manufacturing sector?
- What is the impact of management accounting practices on the financial performance of the firms operating in the manufacturing sector in UK?
Application of the theories of Management Accounting
Management accounting practices are playing a crucial role in helping business establishments to understanding their present situation in the market as compared to their business competitors. It helps business establishments to evaluate their market performance by helping them to understand the cash inflows and cash outflows generated from their business. Management accounting practices helps the modern day business establishments to identify their strengths and weaknesses in the market and this helps business establishments to systematically eliminate the shortcomings and bottlenecks that exist within their business functionalities (Giovannoni et al., 2011). This eventually helps an organistion to enhance their organisational productivity and performance which in turn helps them to develop a competitive advantage over their business competitors.
The theories of management accounting are playing a crucial role in determining the effectiveness of the management accounting practices which are being utilised by the modern day business establishments to measure their financial performance in the market. There are two management accounting theories which are playing a crucial role in the modern day workplace and these include the contingency theory of management accounting and the new institutional sociology of management accounting (Ahrens & Chapman, 2006).
According to Panahian, (2011) management accounting practices are bound to vary from one organisation to the other as their business operations and industries are different from each other. Otley, (1980) has applied the contingency theory to the process of management accounting while describing that there is no single generalised standard of accounting practice which is applicable to all organisations irrespective of their business setting (Smith, 2009). This theory suggests that each organisation’s management practices are determined by undertaking a thorough evaluation of certain crucial factors (such as existing technologies utilised with the business and the overall infrastructure of the organistion) and how these are influencing their business operations in the market. This enables them to identify the most suitable management accounting practices from the context of their business and this is why management accounting practices tend to vary from one organisation to another (Oriwo, 2010).
According to Mills, (2008) manufacturing organisations are making wide scale usage of the management accounting practices and this is helping them to evaluate their business performance and allowing them to better control and manage their rising business expenses. The management accounting practices are playing a crucial role in creating an accurate organisational budget which eventually helps business establishments to allocate their organisational resources in an effective manner. This played a crucial role in directing the future business functionalities of an organisation. In the words of Tayles et al., (2007) the utilisation of the management accounting practices played a crucial role in helping the managers to understand what costs could be incurred by an organisation over the next budgeting period and this provided them with better insights about what challenges could be encountered by an organisation in the near future and how it would have an impact on the cash inflows and revenues generated from their business. This eventually helps the business establishments to effectively plan and develop their business strategies which would enable them to realise their organisational goals and objectives in the market (Giovannoni et al., 2011).
On the other hand, the groundwork for the Institutional Sociology were created by Meyer and Rowan, (1977) in their paper which tried to shed light on the puzzling observations made by a group of researchers who were researching about the educational sector in US. Meyer and Rowan, (1977) were able to identify the data inconsistencies and loose coupling associated with the formal organisational structures/procedures and actual work practices which is followed within organisations which could not be explained by the existing organisational theories. Mills, (2008) has stated that the concept of Institutional Sociology is based on the assumption that some organisations exhibit a highly institutionalised work environment which prohibits effective functioning and teamwork among the staffs. This compels the highly institutionalised organisations to move away from their existing institutionalised structure by adopting a more informal structure and procedure which are valued and appreciated by their staffs at the workplace (Liaqat 2006). This enables the business establishments to achieve greater legitimacy in their daily business activities and as a result they are able to obtain the necessary resources which are crucial for their business growth and sustainability (Ahrens & Chapman, 2006). Whenever business establishments are operating in similar business settings (such as similar industry or similar market environment), there occurs a diffusion of the business forms and procedures which are being utilised by different business establishments (Panahian, 2011).
According to Morale & Lambert, (2013) this process of diffusion has given rise to an additional pressure on the organisational capacity which could lead to organisations becoming isomorphic as compared to the other organisations with their organisational setting. An essential aspect of the theory propounded by Meyer and Rowan's (1977) is how it describes the process of decoupling of the formal produces and structures from the actual work practices that is evident between the different institutionalized organisations (Scott, 2005). More importance and emphasis need to be provided towards the adoption of formal work structures and procedures which could help the business establishments to acquire a greater legitimacy of their business practices and this would eventually help the business establishments to guarantee the timely availability of the necessary business resources which would help them to ensure the future continuity of their business operations in the market. This eventually helps in ensuring the future success of the organisation and at the same time ensures that the resources are detached from the daily organisational practices which would never compromise the normal workflow and productivity (Adler et al., 2000).
Financial experts have often argued that business establishments must be strategic in their response towards the institutional pressures which they are encountering in their respective business sector. Tayles et al., (2007) has described that business establishments on their part can either choose to adhere with the existing business regulations or they can opt for the adoption of precise formal structures or procedures which would inherently helps them to gain legitimacy in their business operations albeit in a manipulative manner. Thus, the business establishments would be able to secure their future business resources and grants which are critical to their success. Smith, (2009) on the other hand has criticised the so called concept of decoupling from actual operations in another theory of NIS theorizing and termed it to be a process of window dressing. There have been significant evidence of conflicts that have resulted from the process of decoupling of the institutionalized structures from the actual organisational practices and this has essentially challenged the definition of institution proposed by Berger and Luckman in the year 1966 which stated that institution was merely a reciprocal typification that showcased the normal course of actions portrayed by the different types of actors (Mills, 2008).
While Meyer and Rowan had tried to substantiate the reliability of their theories based on effective fact findings, this was challenged by Tolbert and Zucker, (1996). According to Tolbert and Zucker, there was an inherent ambiguity associated with the Intuitional Sociology theory propounded by Meyer and Rowan which arises from the use of the word “institutionalized” within their argument (Scott, 2005). Their argument in itself contradicts the claim that institutional structures are suitable whenever they are decoupled from the organisational behaviour. This is mutually contradicting the fact that an organistion in order to be institutionalised must create an organisational structure that initiates actions. Thus, organisational structures that are not translating into actions can never be considered to be a social structure (Scapens, 2006).
According to Wijeywardena and Zoysa, (1999) in a comparative analysis of the management accounting practices that are followed in Japan and Australia, it has been found that there was a difference in the adoption of management accounting practices in both these countries. Findings from the study indicated that the Australian companies were more favourable towards the use of cost control tools (such as standard costing, budgeting and variance analysis) during the manufacturing stage while their Japanese counterparts placed greater importance and emphasis on the costs reduction and cost control tools. In the words of Wijeywardena and Zoysa, (1999) the Japanese companies were more capable and better equipped than the Australian companies at understanding how the business expenses needs to be managed and controlled during the process of product planning and the different stages of the product lifecycle than when the products have entered the stage of mass production.
Adler et al., (2000) conducted a study to understand the management accounting practices which were being followed by the manufacturing companies in New Zealand. The results obtained from the study indicated that there was a greater amount of emphasis provided to the traditional management accounting techniques such as direct costing and standard costing as compared to the more advanced management accounting techniques like strategic management accounting.
Determinants of monetary performance in manufacturing organizations:
It is very significant for all the stakeholders of the organization to know about the financial performance of the company but for the investors, it is most important fact to know about the organization. There are various factors upon which the company market value depends and they are company’s preset profitability, the risk undertaken by the company and the risk of the company profile and also the growth of the economic capability of the company in the market (Gichaaga, 2014). These factors are the major determinant of the expansion of the firms that belongs in the manufacturing industry.
There are a few scholars that have gone in the opposite direction and have stated that the shareholder’s value is dependent upon the indicators of finance that is based upon the information of accounting. Moreover, net margin of revenue as well as net turnover are the two factors that influences the value of the company as has been stated by some of the scholars. The growth as well as the risk is the two significant determinants of the growth of the firms that are there in the manufacturing industry and the business size can have a positive influence upon the performance of the company financially (Armitage et al., 2013). The larger business in the manufacturing industries can get more loans easily and can increase their production output that can increase their production ability and also increase the ability to earn more revenue.
But there are a few recent studies that have been made which prove the fact that it is the structure of the capital that can also be a significant determinant of performance of the company (Abdel-Kader et al., 2008). Moreover, Barton et al., (2008) has stated that the higher rate of revenue is very influential for the organizations in the business environment as it can help the business to provide the funds that are necessary for later production purpose form their retained earnings.
On the basis of the arguments of the authors in the literature review section, it can be said that improved management accoutring practices can lead to enhanced financial performance of the business organizations. However, in this context, it has been observed that there exist limited researches that support the proposition. The study conducted by Dunk, (2011) emphasized on analyzing the relationship between budgeting and financial performance of the firms. The findings of the study revealed the fact that the formal administrative approach to budgeting played a major role in enhancing the financial performance of the larger firms when compared to the smaller firms. Another study conducted by Abdel-Kader & Luther, (2006) was aimed at analyzing the role of management accounting practice in the food drinks industry in UK. The findings of the study revealed the fact that when business organizations move towards a more uncertain environment, the sophistication level of the management accounting practices tend to increase. Moreover, with decrease in the power of the companies relative to customers, the firms tend to move up the stages of evolution. The analysis revealed the fact that the management accounting practices those are used in the food and drinks industry are not sophisticated and the study revealed the fact that there exist little evidence in context to how management accounting leads to value creation for the companies. A study was conducted by Spaseska et al., (2014) on Activity Based Costing (ABC) Adoption among the manufacturing companies. The findings of the revealed the fact that the inability on the part of the traditional costs systems towards providing relevant cost is a major reason for adopting ABC. It also led to the conclusion that the traditional methods that are used for the allocation of overheads are considered to be inefficient in providing global competitiveness to the firms. Moreover, on the basis of the findings of the study, it can be concluded that that the it is more likely that the larger firms tend to adopt a diverse mix of products and services and this in turn helps in making the use of ABC beneficial. The study was also observed to be recommending the fact that the business organizations those have not adopted ABC mainly because of the high cost associated with adopting ABC should emphasize on adopting the ABC in the long run since in the long run the benefits of ABC would outweigh the costs of adopting ABC.
Thus, on the basis of the above aspects together with the aspects derived from the critical review of the available literature, it can be said that the management accounting practices plays an important role in enhancing the financial performance of the business organizations. It can be also be said that the management accounting practices has an important role in ensuring the efficiency of the management of the firm and it also leads to enhance financial performance of the business organizations. From the discussions, it can be inferred that effective use of management accounting practices can be related to, and associated with a wide area of organizational performance. This suggests the fact that the management accounting practices can be considered to be one of the crucial practices that can prove to be beneficial in enhancing the performance of the organizations operating in the manufacturing sector in UK. However, it has also been evidenced that the using effective management accounting practices alone cannot lead to enhanced financial performance of the business organizations, rather there should be other complementary synergy factors those can internal or external to the ent3erprise that can have a significant impact on the financial performance of the firms.
Research Methods, Conclusion and recommendations:
This chapter of the research will undertake the methodology part of the research and will outline the design of the research as well as the search strategy that will be followed during this research process.
One of the most significant techniques that are used by the researcher in order to make better understanding of the research is the design that is prepared for the research (Lewis, 2015). This particular research will be secondary research in nature and thus will include data collection from the secondary sources. Usage of accurate tools and techniques for the purpose of data collection is necessary in order to collect the data that can be used by the researcher for analyzing them.
Due to the fact that this is a secondary research, the data will be collected form the secondary sources or the researches that have been conducted before and the articles that have been published in the past (Matthews et al., 2010). The search strategy included searching the articles in the database of Google Scholar and there were altogether of 20 articles and journals found in this particular topic of which most of them were excluded by the researcher as most of the articles and journals were though related to the topic but were not written in context of manufacturing industry. As this research has been conducted in the context of manufacturing industry, the articles and journals that included the context of other market were excluded. Moreover, some of the articles also used jargons and for that reason, those articles were also excluded as well. Lastly, the articles that were published before the year 2008 were also excluded and thus the research was conducted with the help of three articles. It is also worth to mention that the researcher has used keywords while searching the database and came across the articles with which the keywords matched. Three articles that were included during the study of the research included the research conducted by Abdel-Kader et al., (2008), Armitage et al., (2013) and Gichaaga (2014).
Keywords used for search:
While the search was made in the database of Google Scholar, the search strategy included searching in the database through the keywords and the keywords included management, accounting, practices, traditional, modern, manufacturing, industry, financial, performance and so on.
In order to make the research an ethical one, the research ethics was followed by the researcher and throughout the research, proper references was provided form the sources where the data has been taken during the research study. Moreover, the following of the ethics of the research is significant as not following the ethics of the research can bring in legal trouble for the researcher (Resnik, 2015).
Thus, the above discussion proves that methodology for the research is a significant part of the research and formation of the research methodology can guide the researcher towards collection of data in an appropriate manner which can help the researcher to reach the objective as well.
It can be concluded form the discussion above that information for the purpose of making decisions can be regarded as the most extremely used practices of management accounting in UK manufacturing industry. Additionally, there are other processes also that are followed during management accounting as well and those include budgeting procedure, strategic analysis, costing, evaluation of performance as well as leverage and size (Uyar, 2010). Thus it can be known that the researcher has been successful in achieving the objectives of the research as the first objective included the establishment of the practices undertaken by the manufacturing firms of UK in management accounting.
Moreover, the second objective has also been fulfilled by the researcher which was taken for the study and that can be known from the fact that it has been found out during the research that in UK, the management accounts firms on the first instance addresses the risky areas of the organization and thus tries to influence the performance of the organization with the help of assessing the rate of investment and the rate of return of a particular project. Moreover, the accounting management helps in the development of definite strategies that can help the manufacturing organizations to sustain in the market with the help of receiving competitive advantage and this can help the manufacturing organizations to improve decisions making process that can help in providing more returns to the organizations. Thus the second objective has also been linked with the study which states that finding out the effects of the management accounting exercises that can help in improvement of the financial benefits of the organization in the manufacturing sector:
The particular study has been focussed towards the use of management accounting in the manufacturing sector firms of UK and thus this study has helped in enhancing the awareness that is related to the decisions making which is a significant in the manufacturing sector industry. Moreover, it can be recommended from the findings part that in order to attain financial measure with the help of proper performance, the firms should focus upon ROQ (return on equity), EPS (earnings per share) and ROA (return on Assets) (Gichaaga, 2014). These things have also gained their popularity in the literatures written by the scholars and also by the researches during the last two decades.
It is also significant for the accounting managers of the manufacturing companies to increase the company values with the help of helping the company to make decisions and also make decisions related to enhancing the awareness of the opportunities of the company.
Moreover, the curriculum of the accounting procedures should also be developed in relation to the accountants as well which will help the manufacturing sector companies of UK to enhance their level of performance.
Areas for further research:
This kind of researches can be conducted upon the other industrial sectors in order to know the importance of management accounting in other industries too and how can it help in development of the organizations in those sectors. Furthermore, other countries can be taken up for the purpose of research where there are different kinds of macro environmental factors and diverse micro environmental factors that affect the firms of the organization. A cross country comparison can be an ideal way to research and find out how the management accounting can differ from one country to another and how the environmental differences can influence the manufacturing industries as well.
In addition to this, it can also be researched and found out that why are the companies in UK or in other countries are not making usage of the advanced tools in order to increase the profitability of the companies. There are limited amount of benefits that are taken by the organizations that exists in the manufacturing industry and thus this question has been raised and it is necessary to find out that why the manufacturing firms are sceptical about the fact of using new tools and techniques in order to develop the companies. Lastly, it can also be stated that there is requirement for finding out the relation and the dependence level that the new theory has upon the theories that are followed since the traditional times.
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