APPLICATION OF COST AND MANAGEMENT ACCOUNTING TO SMALL SCALE BUSINESS IN NIGERIA
It is axiomatic that continuous existence of all business concerns depends on the efficient and effective practice of cost and management accounting principles. The principal objective of cost accounting is the provision of detailed information for planning, control and decision making.
In Nigeria, however, there is the recognition that the application and practice of cost and management accounting principle in the informal sector (to which small business belongs) is not without criticism. Small businesses seem to underestimate the powerful use or roles of these accounting principles in ensuring an effective and efficient day to day running of their businesses. Thus, there seems to be no relationship between the costing system and the activities or operations of the small businesses. Besides, the information provided by the costing system tends to be doubtful and inaccurate for the intended purpose. In most cases, preparation of exception reports and position are not considered necessary. But where they are prepared, they are not produced at appropriate intervals and early enough to be valid.
Regrettably enough, it envisaged that this ugly situation could continue inspite of its attendant consequences unless entrepreneurs are made to understand the basic application of these accounting principles to their businesses. Hence, concerted efforts to shape a new directional focus that will ensure an efficient and effective cost and management accounting practice in the activities or operations of small business is urgently required. This is the essence of this group presentation.
Need for a Cost and Management Accounting System: – An accounting system is a formal means of gathering and communicating data to aid co-ordinate collective decision in the light of overall goals or objectives of an organization. It is the major quantitative information system in almost every organization (Hongren and Sundem, 1987).
Cost and management accounting is a formal means of gathering, measuring, analyzing and reporting cost data to aid management in coordinating collective decisions in the achievement of the overall goals of an organization. As an integral part of the management process, it distinctly adds value by continuously probing whether resources are used effectively by people and organizations in creating value for customers, shareholders or other stakeholders.
In this regards, resources include not only financial ones, but also all other resources created and used by organization as a result of financial expenditures. Thus, information and knowledge, work processes and systems, trained personnel, innovative capacities, morale, flexible cultures, and even committed customers may be included as resources:
Generally; an effective cost accounting system provides information for two broad purposes:
1. The accumulation of cost data for external reporting
2. The collection of quantitative data for internal use by management in carrying out its functions of planning, control, decision making and the formulation of overall polices.
The cost accounting system of an organization is the foundation of the internal financial information system. Biggs (1972) realized the importance of cost accounting and stated that without a system of cost accounts, it is doubtful whether a business of any size can survive in the intensely competitive conditions of today, but it must be emphasized that just as no two business are alike, even in the same industry, so no ready- made system of cost accounts can be provided to suit each and every business. The underlying principles, conventions and objects of all costing system are the same, but the application of these principles and methods by which the objects are to be achieved must vary with circumstances. A good cost and management accounting system should therefore aim at accomplishing the following purposes:
1. To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expense or in the use of machines or equipments and tools. Analysis of the causes of unsatisfactory result may indicate remedial action.
2. To reveal sources of economies in production, having regards to methods, types of equipment, design, output and layout, daily, weekly, monthly or quarterly information (reports) may be necessary to ensure prompt corrective action;
3. To arrive at the cost of production in every unit, job, operation, process, department or service and develop cost standards.
4. To present comparative cost data for different periods and various volumes of production output, and to provide guidance in the development of business.
5. To provide actual figures of cost for comparison with estimates and to serve as a guide for future estimates or quotations, and to assist the management in their price-fixing policy
DEFINITION OF SMALL ??“ SCALE BUSINESS
Generally speaking, there is no consensus on the definition or nature of small scale business world wide considerable fuzziness persists about what the term denotes. Different countries, institutions, and individuals have put forwards various descriptions of a small business based on some parameters.
The economist??™s definition of small firms attempted to provide the size of what should be a small business thus ???a small business is one that has only a share of its market, is managed in a personalized way by its owners or part-owners and not enough medium of an elaborate management structure and which is not sufficiently large to have access to the capital market for the public issue or placing of severity???. Davies (1982) quoted the American committee for economic development (CED) as defining small business as a form having at least two of the following four key factors:-
??? Management of the firm must be independent and usually the managers are the proprietors
??? The area of operation must be mainly local with workers and owners living in one home or community
??? Owners supplied capitals
??? The relative size of the firm with its industry must be small when compared with the biggest units in the field. These measures can be in terms of sales volume, number of employees, and so on. Thus, the parameters adopted by any country or institution vary from period to period. In Nigeria, different theorists have characterized it differently, depending on their mode of analysis and the emphasis. However, Oshagbemi (1985) argued that, the main criteria used throughout the world to describe small-scale business include.
a. Number of employees
b. Sales volume
c. Financial strength
d. Relative size
e. Initial capital out lay
f. Independent ownership
What ever definition or criteria that may be used to define small scale businesses, the fact remains that the concept is related to the informal sector of an economy, which is usually perceived by policy makers as the engine room of economic empowerment, progress and growth.
THE IMPORTANCE OF COST AND MANAGEMENT ACCOUNTING TO SMALL BUSINESSES.
The importance of accounting records and information (here accounting records include costing records) to the survival of these businesses organizations can not be overstressed.
Nwachukwu (1990), in this regard wrote that ???for an entrepreneur, the most important aspect of his information comes from financial accounting???. This in brief is the score card that consists of balance sheet, income statement and other supporting documents. They are indicators of growth potentials, earning ability, liquidity and stability. These points the important role played by accounting records in any business organization, no matter the size.
There is no conventional approach to accounting practice by small scale businesses or operations. On an average, studies have indicated that, the artisans apply cost to their product based on discretion, common sense and sometimes associated with the way of carrying out their business.
UkPai (1997) in the analysis of cost accounting techniques and the benefits in costing of products and services of large scale business as well as small scale business, maintained that, for any business to be a success, there has to be a group of people or persons who should be responsible for the achievement of the goals of the business. The entrepreneur is the person responsible for the achievement of the small scale business. He stressed that cost and management accounting is the basis of decision making and planning in order to make profit.
According to Lasser (1967) ???Half of the small business failures studied are due to poor and inadequate method of costing of their raw material, labour and overhead to their product, bad record keeping and too much overhead???. He went on to stress that poor costing of product and services hinder management from achieving their goals. He noted that one of the factors responsible for the inadequate costing approach among small-scale business is inadequate knowledge of the entrepreneur on various management facts. He further explained that poor decision making by the entrepreneurs on cost control is the bane of the small businesses.
The Application of Cost and Management Accounting Principle to Small Scale Businesses:
There are a good number of control systems within an entity. But cost/management accounting system is fundamental. It is the foundation of the internal information system. Thus, the application of cost and management accounting in small scale businesses can be assessed under the following major areas:-
a. Inventory Control System: The rate of determination of store items naturally varies with materials concerned. The fact however, remains that the longer an item is held in stock the more risk there is of deterioration. For this singular reason, it is an elementary rule of good costing system that stock should be issued on the basis of first-in first out (FIFO) i.e. the oldest stock is disposed off first.
b. Location System: Improper system is at variant with good principle of cost accounting practice. Material should be arranged well in the store so that there is a specific location to enhance retrieval when necessary.
To employ properly accepted system of stock location is a must if the information sector must increase productivity. Thus, the importance of knowing quickly where to find every single item of stock the moment it is required can not be over stressed.
c. Materials Storage: Costing plays an important, role in the area of material management. Vast amount of inventory can be ruined in every fiscal year because of bad storage. The storage of materials involves the physical custody as well as the preservation. When businesses expose their items or wares to hazardous climatic condition, it can result in wastage, rusting and evaporation.
Storage problems in small businesses can be caused by wrong planning, misapplication of materials management principals, alteration of material management procedures and lack of professional??™s advice. All these are what cost and management accounting seeks to address. Moreover, it is the requirement of a good cost accounting principle that unauthorized entry or movement in the store should be disallowed. It is therefore own contention that such ???no entry??? measure should also be applicable to pests as they can cause a great deal of damage to inventories. This can be done using process analysis and cost management technologies.
d. Decision Making Process: In the area of decision making, cost /management accounting if adequately and properly applied should provide information regarding which product to produce among alternatives. Decision affecting paicing, selling a product at separation point or processed further, delegating a product line and make or buy decision are all out put of good cost and management accounting principles.
It is worthy of note that the objective of all business undertakings is to generate income, which is greater then the associated cost of production. But the fact remains that the effect of lack of well articulated information and proper procedure for analyzing information variables for effective decisions making can ruin the corporate existence of an entity. Cost and management accounting principle is therefore a veritable tool or companion in the process of quantitative and analytical means of decision making through the use of such technologies as decision analysis and responsibility accounting.
Other specific applications of cost and management accounting principles can be seen in the area of profitability analysis and budgetary control e.t.c.
In Profitability Analysis: Cost and management accounting principle helps small scale businesses to assess the profitability of their productive activities either on weekly, monthly, quarterly, or yearly basis.
This can be done by adopting any one of the costing technique available. Where direct costing is adopted, the implication would be that such a firm would only be interested in covering their variable costs and making contribution toward fixed costs and profits.
In budgetary control: Most small scale businesses do set budget cost and management accounts helps the entrepreneur to adopt a suitable budgetary control method available to make informed decision and evaluate his capital budgeting decision and performance in the previous year. Thus, businesses can adopt any of these budgeting methods: i.e. incremental budgeting, previous year plus inflation method, zero based budgeting method and rolling budget.
For any organization to survive therefore, (especially in this competitive, ever-changing world), it must put in place sound accounting and management principle. This is so because: managers need information for decision making and an understanding of cost behaviour is fundamental to managerial and cost accounting, and management accounting information and the way it is used can support or hinder action and change of action in organizations.
SUMMARY AND CONCLUSIONS
Cost and management accounting is a part of management process of small scale businesses in Nigeria. It is concerned with the process of cost determination and financial control using budgets and cost accounting technologies and budgetary control techniques, provision of information for management planning and control and reduction of waste in businesses through the use of decision analysis, and responsibility accounting.
Management and cost accounting provides information aimed at assisting management in formulation of policies, directing, organizing, planning and controlling of activities. Thus, the survival and successes of small scale business is purely a function of an efficient and effective applicability of cost and management accounting principles in the day to day running of the business.
Asechimie, D.P.S. (1992) A history of Accounting in Nigeria. CSS Press, Port Harcourt, Nigeria.
Biggs, J. (1985) Cost and Management Accounting. Pitman Books Ltd. London.
Garbult, D. (1976) Cartes Advanced Accounts. Pitman Books Ltd. London
Horngren, C.T. and Sundem G. L. (1987) Introduction to Management Accounting, 7th Ed. Prentice.
Lucey, T. (1986) Costing Instructional Manual; ELBS/DP. Publication Ltd: London.
Morse, W.J. (1978) Cost Accounting (Processing), Evaluating and using Cost Data: Addison Westey Boston USA.
Nwachukwu, C.C. (1990) The Practice of Entrepreneurship in Nigeria: Africana FEP Publisher Ltd., Onisha, Nigeria.
Nzelibe, C. (1988) Management of Small Scale Business in Nigeria:
Fourth Dimension; Enugu, Nigeria.
Omolehinwa, W.O. (1985) Fundamentals of Cost Accounting; Ayo Sodium Publisher Ltd., Abeokuta, Nigeria.
Owler, W.L. and Brown J.L. (1984) Wheldon??™ Cost Accounting Macdonald and Evans, London.
Ukpai, N.A. (1997) Basic Managerial Accounting paragraphics; Port