2.

0 Literature Review
Introduction
The thesis seeks to identify the management accounting practices (MAPs)
that are employed by manufacturing SMEs in Angeles City. Therefore the thesis
starts with an overview of management accounting, in order to provide an outline of
its development and to highlight its importance for management and small
businesses.
Small and medium-sized enterprises (SMEs) make up the vast majority of the
business population in most countries in the world therefore they constitute a vital
force in modern information-based economies (Mitchell and Reid, 2000). In
Philippines the SMEs population comprises approximately 99.6 percent of all Filipino
businesses (PSA,2014). Therefore this sector plays a crucial role in the economy as
an engine to generate economic growth in Philippines as well as its significant
ability to create employment.
Management Accounting
There is no generally accepted definition what is really meant when talking
about management accounting (Scapens, 1991). In early research the term cost
accounting was often used, coming from the central purpose of providing cost
information for economic decision making (Chenhall and Smith, 2011). Hilton
and Platt (2011) stated that management accounting is the process of identifying,
measuring, analyzing, interpreting and communicating information in pursuit of
organizations goals. Management accounting is integral part of management
process. Hilton and Platt (2011) also stated that management accountants are
important strategic partners in an organizations domestic and international
management teams. Usually, the larger the organization is, the greater is
managements need for information. IFAC (1989,) in IFAC (1998, p.99) defined
management accounting as the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of
information (both financial and operating) used by management to plan, evaluate,
and control within an organization and to assure use of and accountability for its
resources IFAC (1989).
In the UK, Drury et al. (1993) reported on MAPs in 303 UK manufacturing
organizations and found out that a variety of different practices were used. Although
many appeared to correspond closely with theory, there was also evidence of
considerable gulf between some aspects of theory and practice for some
respondents. Abdel-Kader and Luther, (2006) conducted a survey on MAPs in the
UK food and drinks industry. They concluded that traditional management
accounting is alive and well but there are indications of an increased use of:
information concerning the cost of quality; non-financial measures relating to
employees; and analyses of competitors strengths and weaknesses.
In other European companies, studies in management accounting were
conducted by various researchers. For example, Anderson and Rohde (1994);
Laitinen, (1995); Israelsen et al. (1996), Bruggeman et al. (1996); Pierce
and ODea, (1998); Szychta, (2004); and Hyvonen, (2005).These studies
covered a variety of different MAPs such as costing, planning and control,
performance measurement and evaluation and decision support system. For
example, Bruggeman et al. (1996) examined the use of MAPs within Belgian
companies. They found that traditional approaches were still in use although
companies had started to adopt new techniques such as ABC. Pierce and ODea
(1998) investigated MAPs among Irish management accountants and reported that
traditional techniques continued to dominate management accounting systems
(financial measures of control and performance evaluation); and that the update of
more
modern techniques low (ABC and target costing) was generally. This suggests that
the main contribution of newer techniques may be in supplementing, as opposed to
replacing, traditional techniques.
In another recent study, Hyvo nen (2005) provided empirical evidence on
MAPs in Finnish manufacturing companies. The study recorded the extent of
adoption of the MAPs, the perceived benefits from their use and ascertained
intentions for future developments in these practices. The results indicated that
financial measures like product profitability analysis and budgeting for controlling
costs will continue to be important in the future, but noted that greater emphasis
will be placed on newer non-financial practices like customer satisfaction surveys
and employee attitude surveys in the future.
Shields et al. (1991), who summarized the MAPs literature in U.S and
Japan, discovered that there are many similarities as well as differences in the use
of management accounting
between Japanese and U.S companies. For example, they found that: there is about
the same use of direct (variable) costing and full (absorption) costing in both
countries though the Japanese firms report more frequent use of process costing to
accumulate product costs and a higher percentage of U.S. firms do not use any form
of CVP modeling. One of the biggest reported differences between Japanese and
U.S. firms is in the use of capital budgeting decision models.

The studies discussed above only cover MAPs at an overview level. This
section reviews research into specific MAPs and techniques. The majority of studies
have concerned costing systems; budgeting and performance evaluation. Decision
support systems and strategic management accounting are less commonly studied.

Costing
Research has focused on which costing systems are used by firms. The
following discussion reviews evidence on the level of uptake of costing systems
from previous studies. The two main costing methods adopted were absorption
costing and direct (variable) costing. Absorption costing system is general preferred
globally. For example Drury et al. (1993) observed that 58 per cent of U.K firms
often or always used absorption costing and Scherrer (1996) found that around
half of German firms applied this technique. Meanwhile, Shields et al. (1991),
who made a comparison between Japan and the U.S reported that Japanese
companies indicated about 59 to 67 per cent usage against a slightly higher uptake
at 65 to 75 per cent by U.S companies. More recently, Szychta (2002) found that
90 per cent of Polish firms adopted this technique. In developing countries uptake
rates are similar. For example in India, Joshi (2001)
reported half of Indian firms adopted this technique and Firth (1996) revealed 66
per
cent of Chinese foreign-based companies applied this technique.

A considerable amount of research has focused on activity-based costing

(ABC) despite
the survey evidence generally indicating that with the exception of the U.S and
Australia, it is only used in a small minority of companies surveyed. In the UK
uptake has been consistently poor (see for example, Drury and Tayles, 2000; or
Abdel-Kader and Luther 2006); and in other European countries the position is
similar at just below or just over 10 per cent (see for example, Israelsen et al.,
1996; Cinquini et al., 1999 or Szychta, 2002). In New Zealand Lamminmaki
and Drury (2001) found that NZ manufacturers appear to be more advanced in
terms of ABC adoption than UK
companies as a greater proportion of manufacturers had held discussions on ABC
and a
greater proportion indicated an intention to use ABC.

Contrary to the results in European countries and developing countries, U.S

and Australia, results reveal a much higher uptake of ABC systems. Hrisak (1996)
and Krumwiede (1998) indicated that ABC was adopted by just over half over U.S
firms although later study by Ittner et al. (2002) reported uptake at just over a
quarter of companies.

The extent of use of other costing techniques such as process costing and job
costing has also been widely researched. For example, Shields et al. (1991) noted
that Japanese firms report more a frequent use of process costing (55 per cent to 61
per cent) compared to U.S companies (24 per cent to 36 per cent). Meanwhile in
Sweden, Lukka and Granlund (1995) indicated that 41 per cent of Swedish
companies implement process costing compared to 38 per cent using job order
costing. Lastly Wijewardena and De Zoysa (1999) discovered that more than
half of the Australian companies used process costing (52 percent) or job-order
costing (30 percent) as the main product costing method - which is a not dissimilar
to the findings of Lukka and Grandlund
(1995).

Budgeting
Budgeting is perceived as an important control system in almost all
organizations (Hansen and Van der Stede, 2004). The main focus on budgeting
has been on uptake rates and the purposes underlying its use.
The use of specific types budgeting technique such as flexible budgets,
rolling budgets, ZBB and operational budgets has been researched. Nik Ahmad et
al. (2003) found that the uptake of flexible budgets in Malaysia is higher compared
to those in UK and New Zealand. The relatively low results also were by few studies
(see Pierce and ODea, 1998; Szychta, 2002; and Abdel-Kader and Luther,
2006). Szychta (2002) suggested that the reasons of low adoption include:
generally no major change in activity within a year; volumes do not move that
significantly and too difficult to report to nonfinancial departments.
With respect to control aspects of budgeting, Puxty and Lyall (1989) found
that
majority of UK industrial companies were using both standard costing and
budgeting system in their firms. Similarly Guilding et al. (1998) found that
standard costing systems continue to be popular and that the majority of
accountants surveyed did not envisage abandoning standard costing and variance
analysis in advanced manufacturing technology environments.

Hansen et al. (2003) claimed that the vast majority of U.S. firms retain a
formal budgeting process despite long list of problems and many calls for
improvement in budgeting. Similarly Dugdale and Lyne (2004) found that
budgeting is alive and well. They concluded that while traditional budgeting is now
more likely to be combined with increased use of non-financial indicators, its demise
seems unlikely.

Performance evaluation
Emmanuel et al. (1990) noted that performance evaluation was an
important function of
management accounting. Performance evaluation provides information for
managers to support the achievement of their organizations strategic objectives
(Jusoh and Parnell, 2008). Hall (2008) argued that in recent years organizations
have sought to develop more comprehensive performance measurement systems
(PMS) to provide managers and employees with information to assist in managing
their operations.
Newer performance measures based on non-financial measures, have been
more widely
applied by organizations over time (Drury and Tayles, 1993; Gomes et al.,
2004; Ismail, 2007). Banker et al. (2000) argued that the primary reasons
suggested for the use of nonfinancial performance measures are that these
measures are better indicators of future financial performance than accounting
measures, and they are valuable in evaluating and motivating managerial
performance.

Decision support system

Wu et al. (2007), hold that effective decision making is the most important
key factor in todays rapid and changing competitive environment. The decision
support analysis can be divided into short term and long term analysis. Abdel-
Kader and Luther (2006) argued that for regular or short-term decisions
management accountants can use costvolume-profit (CVP) analysis, product
profitability analysis, customer profitability analysis, and stock control models.For
longer-term capital investment decisions management accountants can produce
and review accounting rates of return and payback periods as well as complex
signals based on discounted cash flow.
Product profitability analysis has been adopted to a significant extent in both
developed
and developing countries. For example, in U.K 69 per cent of respondents reported
its use (Abdel-Kader and Luther, 2006); in Australia 89 per cent (Chenhall and
LangfieldSmith, 1998); and in India 82 per cent (Joshi, 2001).

Strategic management accounting

A final set of MAPs is encompassed by strategic management accounting
(SMA). Bromwich (1990) defined SMA as the provision and analysis of financial
information on the firms product markets and competitors costs and cost
structures and the monitoring of the enterprises strategies and those of its
competitors in these markets over a number of periods. Drury (1994) argued that
conventional management accounting does not provide the financial information
required to monitor existing strategies or support strategy formulation.

The role of management accounting in the management of an organization

Management accounting plays an important role in the management of
todays
organizations. Above definitions of management accounting provided by IFAC in
1989 saw management accounting as an integral part of the management
processes whose role was to provide information essential for; controlling the
current activities of an organization; planning its future strategies, tactics and
operations; optimizing the use of its resources; measuring and evaluating
performance; reducing subjectivity in the decision making process; and improving
internal and external communication (IFAC, 1998, p. 99).
Garrison and Noreen (2000) agreed that management accounting
information is used to help managers carry out their responsibilities of planning,
directing, motivating, and controlling. Additionally Bhimani (2002) claimed that
the main objective of management accounting has been to help organizations plan
their future and then to monitor their performance. Chenhall and Langfield-
Smith (2007) agreed with this position arguing that management accounting has
had a primary function in developing performance measures to assist managers in
planning and controlling their organizations.
In a more recent study, Valanien and Gimauskien (2007) studied the
changing role of management accounting in Lithuania. They concluded that the role
of modern management accounting has extended from data accumulation to
providing information as to the progress of strategy implementation. Thus the role
of management accounting has changed focus from being just directed toward
shareholders to delivering customer employee-shareholder integrated solutions.
Heidmann et al. (2008) explored the role of management accounting in strategic
sense making. Their research provides evidence that managers do not primarily use
management accounting to generate information relevant to strategic issues.
Instead, this research suggests that managers use management accounting to find
specific information that helps them to substantiate information about strategic
issues from informal sources.

Management accounting practices and organizational performance

Mia and Clarke, (1999) stated that the performance of an
organization/division may be
viewed as the extent to which the organization/division has been successful in
attaining its planned targets.

Positive evidence for an association between the use of budgeting and performance
Merchant (1981) was an early study which sought to establish a relationship
between the use of budgeting and performance by testing for an association
between organizational performance and the approach of the firm to budgeting. Two
distinct approaches were defined and termed the formal administrative approach
and the interpersonal approach. The findings indicated that the formal
administrative approach to budgeting was more strongly related to good
performance in larger firms than in smaller firms, which tended towards a more
interpersonal approach to budgeting.

Traditionally, performance measures have been internal, aggregate metrics of

financial
performance (Chenhall and Langfield-Smith, 2007). However the relevance of
this measure has been challenged in the current business environment. Competition
has compelled firms to implement management strategies and systems to
overcome dissatisfaction with traditional short-term perspective financial
measurement systems (Said et al., 2003).
Gul (1991) examined the interaction effects of MAS and perceived
environmental uncertainty on Australian small business managers' perceptions of
their performance. The results confirmed the hypothesis that the effects of MAS on
performance were dependent on environmental uncertainty. Under high levels of
uncertainty, sophisticated MAS had a positive effect on performance but under low
levels it had a negative effect.

Negative Effect
Klammer (1973) examined the relationship between the sophistication of
capital budgeting techniques used by the firm and performance. No consistent
significant association between performance and capital budgeting techniques was
found. Klammer (1973) argued that the mere adoption of various analytical tools
would not deliver superior performance, and that other factors, such as marketing,
product development, executive recruitment and training and labour relations, are
likely to have a greater impact on profitability. The finding re-affirms the message
that sophisticated capital budgeting methods do not guarantee better performance.
Perera et al. (1997) found that there is no association between the use of non-
financial measures and perceived performance in plants that follow a customer-
focused manufacturing strategy. Young and Selto (1993) found little evidence
that the use of non-financial measures in JIT facilities was associated with
differences in manufacturing performance. In the U.S, Gordon and Silvester
(1999) used an event-study approach to investigate the impact on firm value of an
announcement that firms were using ABC. They found that the announcement of
ABC use did not affect firm stock values. This result is further supported by Ittner
et al., (2002) who found extensive ABC use has no significant association with
return on assets.

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