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European Journal of Business, Economics and Accountancy

Vol. 6, No. 3, 2018 ISSN 2056-6018

MANAGEMENT ACCOUNTING PRACTICES OF THE PHILIPPINES SMALL AND MEDIUM-SIZED ENTERPRISES Joy Lynn R. Legaspi Accountancy Department, De La Salle University Manila, Philippines [email protected]

ABSTRACT The use of appropriate and adequate management accounting techniques can solve everyday business problem and can become a source of competitive advantage. This study describes the managerial use of management accounting information in developing country using a greater number and extensive description of the SMEs demographic profile, the level of its usefulness and understandability about the function of each management accounting practices undertaken. The findings of the study suggest that in the present day’s business environment, enterprises are in need of help more of accountants as their business partner. Small enterprises obtained higher appreciation about the use of statement of cash flow analysis and operating budgets while financial budgets, capital budgeting decisions, managing customers’ relationship and operating budgets were the very useful tools for the medium enterprises. It was appropriate that medium firms utilized more tools due to the nature and complexity of their operations. Small-sized enterprises might not really need some of the tools investigated, as medium-sized would. Overall, small and medium manufacturing enterprises know the cost-benefit approach of utilizing each tool for the organization activities. It can be effective in some situations but may not be successful in others. Therefore, the appropriateness of management accounting information depends upon the resources, operating activities, strategies and the size of the organization. Keywords: Accountant, Manager, Management Accounting; Management Accounting Tools (MATs); Small-Medium-Sized Enterprises (SMEs). INTRODUCTION Businesses are being force to deal with the effects of globalization. Even small and mediumsized enterprises (SMEs) across manufacturing, wholesale and retail trade, accommodation and food service activities, financial and insurance activities and professional, scientific and technical activities need to develop relevant ideas to manage the problems, issues and challenges every day. Thus, management accounting has probably plays an essential role to help managers measure, analyse and report financial and nonfinancial information relevant in making decisions (Horngren et al. 2015), allocating resources, monitoring, evaluating and rewarding performance (Atkinson et al. 2012). According to Department of Trade and Industry (DTI), SMEs are the business activities or enterprises engage in industry whether single proprietorship, cooperative, partnership or corporation whose total assets are valued ranging from over P3 million to P100 million and employ no more than 200 employees. SMEs contributed almost 25.3% or 1,968,452 jobs by small enterprises and 6.8% or 530,784 by medium enterprises. Majority of the SMEs in operation as DTI declaration are in the manufacturing with 13,139 number of establishments, followed by wholesale and retail trade with 28,058, accommodation and food service

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European Journal of Business, Economics and Accountancy

Vol. 6, No. 3, 2018 ISSN 2056-6018

activities with 13,940, financial and insurance activities with 6,113 and professional, scientific and technical activities with 2,008 business establishments (DTI, 2015). Scapens (2006) mentioned that most of the current research in management accounting practices (MAPs) has focused on understanding the nature of management accounting and control systems (MACS) in large private and public organization. Therefore, given the challenges to grow and competing demands, this study emphasized more on managerial use of management accounting information in developing country using a greater number and extensive description of the SMEs demographic profile, the level of its usefulness and understandability about the function of each management accounting tools that make owners, managers and accountants effective in the work place. LITERATURE REVIEW Theoretical Framework of Reference Historical studies have played a remarkable role in management accounting in the recent years. Holden, Fish and Smith (1941) performed an empirical studies of corporate organization and discovered that control is a prime responsibility of top management. Control serves as a monitoring process to identify if the operations objectives are being accomplished. It was predominantly oriented towards the determination of product cost. The focus on product costs was included in the budgets and the financial control of production processes. Management controls were oriented towards manufacturing and internal administration (Abdel-Kader & Luther, 2004). Management accounting tended to be reactive only when deviations from the business plan took place (Ashton et al. 1995). Then, agency theory makes an important contributions to management accounting. It includes explicit recognition of the behaviour of the agent whose actions in the management accounting system seeks to influence control. Jensen and Meckling (1976) stated that the duty of the agent (manager) is to maximize the wealth of the principal (firm’s owners). In general, a contract is used to specify the terms of a principal-agent relationship. This arrangement works well when the agent makes decisions that are in the principal’s interest but doesn’t work well when the interests of the principal and agent differ since agents are also concerned with their personal wealth. To manage this kind of behaviour the owner may supervise the agents’ performance through an accounting information system (Jensen & Meckling, 1976). Afterwards, contingency theory in management accounting describes how appropriate the management accounting information and control system can be designed to match the size of the organization. There is no one best way in organizing and leading the organization. An organizational leadership style that is effective in some situations may not be successful in others. In other words, the optimal organizational leadership style is contingent upon various internal and external constraints (Drury, 2000). In 1990’s, Björnenak, and Olson (1999) discovered that the focus of accountants shifted to the creation of value through the effective use of resources including technologies in manufacturing and service industries to successfully face global competition. In response to the criticisms made by Johnson and Kaplan (1987) that the lack of management accounting innovation in recent decades and its failure to respond to the changing environment resulted in a situation in the mid 1980’s where firms were using management accounting systems that were obsolete and no longer relevant to the competitive manufacturing environment. Through this, the researchers identified the most recently developed management accounting tools or techniques such as: the business process reengineering, activity based costing; activity

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Vol. 6, No. 3, 2018 ISSN 2056-6018

management and activity based management; local information system; balanced scorecard; life cycle costing and target costing and strategic management accounting (Björnenak & Olson, 1999). Over the last 50 years, the evolution was all about the manner through which management accounting is being used. Specially, research on management accounting change most relates to practices in central economies or developed countries. The Tools Used and Not Used by SMEs in Practice Lucas et al. (2013) worked on the UK SMEs and the number of employees (small – 50; medium – 250) was the criteria used to classify whether the business belongs to SMEs and had been in existence for more than 5 years using questionnaire and interview surveys to CEO/Owner-Managers and other senior managers (as cited in Legaspi, 2018, p.681-683). Lucas et al. (2013) found out that product or service costs for pricing analysis, break-even analysis and working capital measures were the most useful financial information for SMEs. Then some of the small enterprises used budgetary planning and control systems, responsibility centres and cost-volume-profit analysis while it was used by all medium enterprises (as cited in Legaspi, 2018, p.681-683). Lucas et al. (2013) concluded that the used of formal budgeting was most useful for medium firms when decision making is decentralized and they used responsibility centres to assess each departments’ performance while small firms most often decision making is being made by the same person and they do not need responsibility centre (as cited in Legaspi, 2018, p.681-683). Then, Lucas et al. (2013) recognized the non-use of standard costing and variance analysis especially for smaller firms. According to the managers, it could be inappropriate to track all costs to aid an effective operational control. Standard costing and variance analysis was of little help for smaller firms to reduce costs and improve productivity due to small line of production similar to what John and Kaplan (1987) and Maskell and Baggley (2004) investigated. Moreover, Lucas et al. (2013) pointed out the deficiency in using strategic management accounting for SMEs, most of them made an emphasis in applying tactical and operational management. Managers focused more on the necessity rather than planned that made strategic management tool less suitable (as cited in Legaspi, 2018, p.681-683). Unexpectedly, Lucas et al. (2013) realized that capital expenditure appraisal techniques and relevant costs analysis for decision making were not used by any of the firm. For example, SMEs do not consider the use of net present value nor the payback period in dealing with capital expenditures, they simply made decision out of tactical reasons (as cited in Legaspi, 2018, p.681-683). Also, relevant cost analysis considered unimportant for them even when making short term decision. The managers tended to make decisions without much management accounting information which is not the same method or approach suggested in the management accounting textbook. Lucas et al. (2013) studies was consistent with what Nandan (2010) concluded that SMEs failed to utilize much of the MATs into their practices (as cited in Legaspi, 2018, p.681-683).

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Vol. 6, No. 3, 2018 ISSN 2056-6018

Likewise, Uyar (2010) explored the management accounting practices utilized by small and medium manufacturing companies operating in Istanbul, Turkey. The data was obtained from 13 small and 39 medium manufacturing companies in Istanbul using multiple choice and open-ended Like scale questions namely: textile industries (26), paper products and publication companies (9), chemical and plastics manufacturing firms (11), food industries (5), and miscellaneous industries (5) information technology, leather and shoes, constructions, metal, wood products and automotive (as cited in Legaspi, 2018, p.681-683). Budget for planning and control system was considered as the most important management accounting tool by all SMEs However, the cost-volume-profit analysis, responsibility accounting, standard cost variance analysis, target costing and quality costing were considered by some Turkey’s small-medium-sized firms but never the transfer pricing and activity based costing, balance scorecard, capital expenditure appraisal techniques and shortterm decision support tools (as cited in Legaspi, 2018, p.681-683). The result of study made by Uyar (2010) was somewhat consistent with the finding made by Lucas et al. (2013) in terms of budgets for planning and control, responsibility accounting and cost-volume profit analysis (cited in Legaspi, 2018, p.681-683). On the other hand, Sunarni (2013) study was participated by management accountants who work in 30 medium-scale (20-99 employees) manufacturing companies throughout Yogyakarta Indonesia. Budgetary planning and control system and cost-volume profit analysis were considered as the most vital in managing their task which is slightly consistent with the findings of Lucas et al. (2013) However, total quality management and standard costing and variance analysis were included at the top-three most important tools but never used for Lucas et al. (2013) sample companies. A review of management accounting literature suggest that there is gap in the development and implementation of MATs and systems were developed mostly in central economies but are not fully used in developing countries particularly by small to medium companies. Therefore, there is a need for research to examine the managerial use of management accounting information in developing country using a greater number and extensive description of the SMEs demographic profile, understandability of its use, and the behaviours about the use of management accounting tools that make owners, managers and accountants effective in the work place. METHODOLOGY Research Design The researcher used descriptive research type. The primary sources of information were obtained through the use of questionnaire and interview surveys. Research Instrument The respondents offered a set of answers from which they can choose. The questionnaire consist of two parts. The First Part comprises of factual questions about the respondent’s demographic profile such as: position, years of business operation, enterprise classification according to the number of employees, the types of business organization, average level of net income and average level of capital. Along with the place of business operations in the National Capital Region (NCR) well as the selected types of business activities classified and used by National Statistic Coordination Board – Philippine Standard Industrial Classification, 2009 (NSCB-PSIC).

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European Journal of Business, Economics and Accountancy

Vol. 6, No. 3, 2018 ISSN 2056-6018

The Second Part includes the most popular Management Accounting Tools (MATs) utilized that are being used and not used in practice by SMEs and the usefulness of each tools. The respondents were asked to identify the given MATs from 1 to 4 (Likert, 1932), the number indicated the degree to which the respondent considered how useful the management tools for the organization. The researcher gathered the management accounting tools used from the management accounting textbooks of Atkinson et al (2012) and Garrison et al. (2015). Then, the researcher asked respondents who are capable and willing to answer the questions about the use and not use of each management accounting tools in managing their day to day operation. Respondents of the Study The respondents are the owners, general managers, finance/accounting managers and accountants found from the list of establishment given by the DTI as of 2013 per city. As well as the list of establishment provided by the Security and Exchange Commission (SEC) using the SEC i-Register data base as of January 2018 per business sector. Research Locale The study was conducted based on the cities in the National Capital Region (NCR) of the Philippine: Caloocan, Las Pinas, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Navotas, Paranaque, Pasay, Pasig, Quezon, San Juan, Taguig and Valenzuela. Sampling Procedure According to DTI’s List of Establishments 2015, majority of the business operation can be found in the NCR and majority of the SMEs business sectors can be found in the manufacturing with 13,139 business establishments, followed by wholesale and retail trade with 28,058, accommodation and food service activities with 13,940, financial and insurance activities with 6,113 and professional, scientific and technical activities with 2,008 business establishments. The researcher had decided to get the sample subject on the above mentioned business place (NCR) as defined by the DTI and the major business sectors as classified and used by the DTI and NSCB-PSIC, 2009 using purposive sampling technique (Perez & Zulueta, 2010). Then, Gay (1976) offers some minimum acceptable sizes depending on the types of research. Correlational research must have a minimum of 30 subjects. Therefore, the researcher desired sample size totaled 60 samples, 30 for small enterprises and 30 for medium enterprise. The number of employees was used as the criteria to classify whether the respondents belong to small or medium enterprises to be the most widely used criteria in the Philippines (DTI, 2015). Administration of the Instrument The written questionnaires were mailed (LBC), emailed and hand-delivered to the owners, general managers, finance/accounting managers and accountants of selected SMEs registered in the NCR, Philippines operating within 5 years and more. Then, filled out and returned through mailed (LBC), emailed and handed over to the researcher individually. Statistical Treatment of Data To arrive at the analysis and interpretation for objectives one and two the researcher used the frequency, percentage and mean. The weighted arithmetic mean is the most generally recognized measure of central tendency applicable to options of different weights (Calmorin & Piedad, 2009). Then, for research objective three, the researcher comprehend through the

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European Journal of Business, Economics and Accountancy

Vol. 6, No. 3, 2018 ISSN 2056-6018

narrative analysis to know how management accounting information particularly the use and not use of each management accounting tools functioned in their day to day operation. RESULTS AND DISCUSSION The SMEs Profile Table 4.1 illustrates the summary statistics of the SMEs profile. It displays the frequency (n) and percentage (%) distributions according to the size of the enterprise. Table 4.1 Description of the SMEs Profile Small Enterprises n = 150(%)

SMEs Profile Place of Business Operation National Capital Region Caloocan Las Pinas Makati Malabon Mandaluyong Manila Marikina Muntinlupa Navotas Paranaque Pasay Pasig Quezon San Juan Taguig Valenzuela Total Business Sectors Manufacturing Wholesale and Retail Trade Accommodation and Food Service Activities Financial and Insurance Activities Professional, Scientific and Technical Activities Total

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Medium Enterprises n = 150(%)

4 (2.7) 1 (0.7) 23 (15.3) 1 (0.7) 9 (6.0) 22 (14.7) 4 (2.7) 3 (2.0) 1 (0.7) 3 (2.0) 3 (2.0) 6 (4.0) 62 (41.3) 2 (1.3) 5 (3.3) 1 (0.7) 150 (100.0)

7 (4.7) 3 (2.0) 23 (15.3) 1 (0.7) 5 (3.3) 31 (20.7) 3 (2.0) 1 (0.7) 2 (1.3) 2 (1.3) 3 (2.0) 9 (6.0) 52 (34.7) 3 (2.0) 4 (2.7) 1 (0.7) 150 (100.0)

30 (20.0) 30 (20.0) 30 (20.0) 30 (20.0) 30 (20.0) 150 (100.0)

30 (20.0) 30 (20.0) 30 (20.0) 30 (20.0) 30 (20.0) 150 (100.0)

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European Journal of Business, Economics and Accountancy

SMEs Profile

Vol. 6, No. 3, 2018 ISSN 2056-6018

Small Enterprises n = 150 (%)

Position of the Respondents Owner General Manager Finance/Accounting Manager Accountant Total Year of Business Operation 5-10 years More than 10 years Total Number of Employees Small: 10-99; Medium: 100-99 Business Organization Sole proprietorship Partnership Corporation Total Estimated Average Level of Net Income Less than P1 million P1-10 million P11-20 million More than P20 million Total Estimated Average Level of Capital Less than P1 million P1-10 million P11-20 million More than P20 million Total

Medium Enterpri...