Strategic Management Accounting Techniques versus Cost ... · Strategic Management Accounting...
Transcript of Strategic Management Accounting Techniques versus Cost ... · Strategic Management Accounting...
Cairo University
Faculty of Commerce
Accounting Department
Strategic Management Accounting Techniques
versus Cost-plus Technique for Pricing Decision:
Exploring the Gap between Practice and Theory
A thesis submitted in partial fulfillment of the requirements for the
Master of Science in Accounting
Prepared by:
Rana Mohamed Shawky Genidy El-Sharawy
Supervisor:
Prof. Dr.
Said Yehia Daw
Professor of Cost and Management Accounting
Facualty of Commerce- Cairo University
2012
:فى سورة التوبه يقول هللا تعالي
حيم حمن الره الره بسم هللاه
إال تىصسوي فقد وصسي للا إذ أخسج انريه كفسوا ثاوي اثىيه إذ (
ال تحزن إن للا معىا فأوزل للا ما في انغاز إذ يقول نصاحب
ا وجعم كهمة انريه كفسوا وأيدي بجىود نم تسو سكيىت عهي
ي انعهيا وللا عزيز حكيم فهى وكهمة للا )انس
صدق هللا العظيم
(04)سورة التوبه ايه رقم
Examining Committee
Prof. Dr. Mohamed Mahmoud Yousef
Prof.of Cost and Management Accounting
Ex-President of Banisouif University
Prof. Dr. Said Yehia Daw
Prof. of Cost and Management Accounting
Faculty of Commerce- Cairo University
Prof. Dr. Amr Hussein Abd El-bar
Prof. of Cost Accounting
Ain- Shams University
Examining Committee Decision and Date:
Supervisor’s signature:
Prof. Dr. Said Yehia Daw
Prof. of Cost and Management Accounting
Faculty of Commerce- Cairo University
Committee
Chairman
Committee
Member and
supervisor
Committee
Member
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Acknowledgement
I am deeply indebted to my supervisor Prof. Dr. Said Daw, I am really
fortunate to have him as my supervisor and can never forget his patience,
generous and timely support.
My appreciation goes too to Prof. Dr. Mohamed Mahmoud Yousef for
accepting being a member of the examining committee.
Sincere appreciation goes to Prof. Dr. Amr Hussein Abd El-bar for
accepting being a member in the examining committee.
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List of Contents
Subject Page
Examining committee………………………………………………………..
Acknowledgement……………………………………………………………
List of Contents………………………………………………………………
List of Figures………………………………………………………………..
List of Tables…………………………………………………………………
List of Abbreviations…………………………………………………………
Abstract………………………………………………………………………
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1. Chapter One: Introduction 1
1.1 Research problem
1.2 Problem statement
1.3 Research objective
1.4 Research hypotheses
1.5 Research design and method
1.6 Research scope
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2. Chapter two: Evaluating Pricing Decision: A Review of Traditional
and SMA Approach
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2.1 The appropriate MAS within the contingency approach framework
2.1.1. Traditional MAS optimality
2.1.2. The impact of contingencies on MAS: A contingency framework
2.1.3. The prominence of the SMA
2.1.4. SMA definition
2.1.5. SMA external orientation and the organization adopting policy
2.2 The optimal pricing strategy in a dynamic environment
2.2.1 Pricing strategies based upon organization's competitive position
2.2.2 Cost-Plus as dominant behavior for pricing
2.2.3 Permanence of the cost-plus approach
2.3 TC and attribute costing as a pricing techniques
2.3.1 Target costing
2.3.2 Attribute Based Costing
2.4 Organization's performance measurement
2.4.1 Different roles of performance measurement
2.4.2 The relation between financial and nonfinancial performance
measures
2.4.3 Financial and nonfinancial performance measures, a balanced
scorecard perspective
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3. Chapter three: Literature review
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3.1 Literature addressing the relation between SMA and organizational
performance
3.1.1 Study of Cinquini and Tenucci (2007)
3.1.2 Study of Guilding et al. (2000)
3.1.3 Study of Roslender and Hart (2003)
3.1.4 Study of Bhimani and Langfield-Smith (2007)
3.1.5 Study of Lord (1996)
3.1.6 Study of Cadez and Guilding (2008)
3.1.7 Study of Bjornenak and Olson (1999)
3.2 Reviewing and analysis of the first group of literature
3.3 Literature addressing the pricing decision as a dynamic process
3.3.1 Study of Lucas and Rafferty (2008)
3.3.2 Study of Lucas (2003)
3.3.3 Study of Zeithaml (1988)
3.3.4 Study of Dodds et al. (1991)
3.3.5 Study of Monroe and Bitta (1978)
3.3.6 Study of Guilding et al. (2005)
3.4 Reviewing and analysis of the second group of literature
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4. Chapter four: An empirical investigation of the relationships
among SMA techniques, cost-plus pricing and organizational
performance
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4.1 Population of the study
4.2 Sample selection
4.3 Data collection
4.4 Descriptive explanation of the research model
4.5 Research hypotheses
4.5.1 The relation between SMA and organizational performance
4.5.2 The relation between cost-plus and organizational performance
4.5.3 The relation between contextual variables and techniques for
pricing
4.6 Variables measurement
4.6.1 Measuring the application of SMA techniques
4.6.2 Measuring the applications of cost-plus pricing technique
4.6.3. How to measure the organizational performance?
4.6.4. Measuring the contextual variables
4.7 Data analysis
4.7.1 Statistical analysis techniques
4.7.1.1 Data analysis using cluster analysis
4.7.1.1.1 Cluster analysis as a statistical technique
4.7.1.1.2 Using cluster analysis to divide the sample
4.7.1.2 Data analysis using path analysis
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4.7.1.2.1 Path analysis as a statistical technique
4.7.1.2.2 Path analysis to analyze the data collected
4.7.1.2.2.1 Confirmatory factor analysis
4.7.1.3 The structure building of the research model
4.7.2 Statistical results of data analysis
4.7.2.1 The results of testing the relationship between variables of the
first hypothesis
4.7.2.2 The results of the relationships between cost-plus and the
organizational performance
4.7.2.3 The relationships between contextual variables and the SMA
techniques on the organizational performance
4.7.2.4 The relationships between contextual variables and the cost-plus
on the organizational performance
4.8 Findings and discussion
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5. Chapter five: Summary, conclusion, and future research
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5.1 Summary
5.2 Conclusions
5.3 Future research
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References
Appendices
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List of Figures
Subject Page
Figure (2.1) Otley’s (1980) contingency theory framework
Figure (2.2) The main aspects of SMA
Figure (2.3) The six generic performance dimensions
Figure (2.4) Performance measures purposes
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Figure (4.1) The general model
Figure (4.2) The specified model
Figure (4.3) The dendrogram
Figure (4.4) The first and final confirmatory model
Figure (4.5) The descriptive model
Figure (4.6) The final trial for the structured model with the
coefficients of each path
Figure (4.7) Regression weights of nonfinancial performance
components
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List of Tables
Subject Page
Table (4.1) The classification of manufacturing organizations in Egypt
registered in the industrial modernization centre
Table (4.2) Descriptive summary of collected data
Table (4.3) An index for the components used in the confirmatory
factor analysis
Table (4.4) Confirmatory factor analysis results
Table (4.5) Goodness-of-fit and adjusted goodness-of-fit
Table (4.6) The P-value of the paths of variables in final trial structured
model
Table (4.7) Most important goodness-of-fit index indicators for the
final trial structured model
Table (4.8) Comparison between the goodness of fit index between the
first structured model and the final trial structured model Table (4.9) Standardized direct effects between the variables Table (4.10) Standardized indirect effect between the variable Table (4.11) The relationship between the SMA and the organizational
performance
Table (4.12) The relationship between the cost-plus and the
organizational performance
Table (4.13) The extended relationship between the control variables
and organizational performance mediating the SMA
Table (4.14) The extended relationship between the control variables
and organizational performance mediating the cost-plus
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List of Abbreviations
Term Abbreviation
Strategic management accounting
Target costing
Management accounting system
Balanced scorecard
Activity based costing
SMA
TC
MAS
BSC
ABC
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Abstract
This study examines the relationships among the strategic management
accounting (SMA) techniques, cost-plus pricing technique and the
organizational performance. The main objective of the research is to
enhance the organizational performance through the pricing decision
using either the SMA techniques or the cost-plus pricing technique. The
research also examined the extended effect of the control variables on the
organizational performance (financial and nonfinancial) through
mediating the SMA techniques and the cost-plus technique in the pricing
decision.
Cluster analysis and Path analysis were used to investigate the
relationships among SMA techniques, cost-plus pricing and
organizational performance. The data was obtained from cross-sectional
sample of Egyptian manufacturing organizations with a response rate of
27.5%.
Analysis of data indicated that SMA techniques adoption as pricing
techniques can enhance the organizational financial and nonfinancial
performance. However, the direct effect can be reflected more in the non
financial performance perspectives (customer satisfaction, internal
business process and learning and growth) than the financial
performance. Attribute costing has been found to enhance the
organizational performance more than the target costing (TC). Other
SMA techniques were excluded.
Cost-plus pricing technique also affects the organizational financial and
nonfinancial performance. The direct effect is reflected more in the
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financial performance and the indirect effect is showed on the
nonfinancial performance.
Keywords: Strategic management accounting; Cost-plus pricing;
Contingency theory; Cluster analysis.
Chapter One
Introduction
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Chapter One
1. Introduction
The past two decades have witnessed a considerable change in managerial
accounting practice. From the traditional emphasis on financially oriented
decision analysis and budgetary control, managerial accounting has evolved
to encompass a more strategic approach that emphasizes the identification,
measurement, and management of the key financial and operational
activities. A similar evolution has occurred in the management accounting
research. Empirical studies of budgeting and financial control practices are
giving way to research on a variety of modern techniques such as activity
based costing (ABC), the balanced score card (BSC), strategic accounting
and control systems, and economic value performance measures
(International Federation of Accountants, 1998; Institute of Management
Accountants, 1999; Ittner and Larcker, 2001; Baines and Langfield-Smith,
2003).
Different functional departments possess power in imposing their
values/views in the management practices employed. This may be partly
attributable to the personalities and the internal dynamics of the particular
organization concerned. However, it may also be necessary to look beyond
the boundaries of the particular organization to the wider society, to explain
the origins and dissemination of various ‘institutions ’and the dispositional
power reflected in them.
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1.1 Research problem
Traditional management accounting information might described as too late,
too aggregate and too distorted to be relevant for management’s planning
and control decisions (Johnson and Kaplan, 1987). Many of cost information
being produced annually with little or no useful information that can aid to
evaluate the organization’s performance. As a result many of erroneous
decision are made too, for example developing unprofitable products,
unnecessarily outsourcing, and making incorrect cost reduction or a wrong
pricing decision.
The recent past has seen considerable criticism of management accounting
practice. Critics’ primary concern is that the cost and management control
systems used in practice had lost relevance (Cooper, 1990; Johnson and
Kaplan, 1987; Kaplan 1984, 1986, 1988, 1990). Cost plus as a technique or
tool for pricing decision represents the traditional approach for pricing. On
the other hand, SMA techniques or tools represent the modified techniques
for pricing decision. The later include many techniques such as: TC and
attribute based costing.
Moreover, traditional management accounting has not responded to
developments in the technological and competitive environment, with the
result that internal accounting information is frequently inaccurate and
misleading. Contemporaneously, many commentators believe that a
significant gap has developed between traditional management accounting
practices and the normative literature (Otley, 1985; Scapens, 1985;
Choudhury, 1986; Edwards and Emmanuel, 1990).
The principal concern of these critics was that these traditional systems had
failed to keep up with changes in the business environment. In order to
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restore the relevance of cost and management control practices, several new
techniques, including ABC, strategic costing, attribute costing, and TC, have
presented (Lamminmaki and Drury, 2001). Starting in the 1990s, researchers
have attempted to identify factors that may influence a firm’s decisions to
adopt SMA and cost management control techniques.
While the recent past has seen increased interest in SMA, the area is still
under defined and no universally accepted SMA framework exists (Nyamori
et al., 2001; Roslender and Hart, 2003). A review of the literature suggests
two perspectives on SMA can be taken. Firstly, SMA can be conceived of as
comprising a set of strategically oriented accounting techniques. Secondly,
SMA can be viewed as concerned with the involvement of accountants in
corporate strategic decision-making processes (Cadez and Guilding, 2008).
The concept of SMA requires management accounting to focus on
performance measurement using strategic rather than tactical indicators
(Bhimani, 1994). Basically, strategies need to be formulated in accounting
language and supported by the authority of accounting techniques, indicators
and reports if they are to be quantified, developed and monitored.
Management accountants need to adopt a more strategic perspective by
reporting information relating to the competition and the market place
(Boons, 1994; Bhimani, 1996).
Many accountants seem to have accepted the existence of a ‘reality gap’
between management accounting’s conventional wisdom, based on the
neoclassical economic theory of the firm and actual business practice. Whilst
the former recommended the use of a decision relevant cost approach to
pricing decisions, the latter is believed to be dominated by a full cost plus
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approach to pricing. In accepting the existence of a reality gap, accountants
do not seem to have addressed the arguments of economists, the
accountants’ and economists’ respective positions and argues is strongly
supported by the conflicting empirical evidence. On the other hand, the
empirical evidence supporting neoclassical price theory is not strong and
much of the research that generated it is methodologically flawed. These
arguments seriously undermine the research findings of accountants that
have given rise to the belief in such a gap. The reality gap became apparent
as soon as accounting researches began to systematically conduct empirical
studies of management accounting practices. Such studies have been
regularly replicated up to the present day (Drury and Tayles, 2005).
Traditional management accounting practice in the hands of one group may
be performed differently in the hands of another. In this sense, managers do
not just discuss the ends and means efficiency of this or that policy
independent of their own value assessment of the policy; rather they infuse
their contribution with their own values. Traditional management accounting
is a powerful way of analyzing, interpreting and formulating action plans,
and it may well be value neutral; but managers are not value neutral
(Rafferty, 2007).
1.2 Problem statement
The main question of this work is to find out what are the prevailing
techniques used in the Egyptian environment in the pricing decision?. The
research address choosing the pricing techniques, the first is the cost-plus;
the second is by using different strategic management tools. Moreover
assessing the different modified strategic management tools and cost-plus
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can be used individually or side by side determining which policy will be the
fitter in the pricing decision and to the organization success.
1.3 Research objective
The main objective of the research is to enhance the organizational
performance through the pricing decision using either the SMA techniques
or the cost-plus pricing technique. By achieving the main objective of the
research, the following sub-objective may be achieved:
Enhancing the output of the accounting information system by obtaining
more accurate information (cost information, market information, etc.) in
order to increase the value of the firm.
Rationalizing the decision making model through evaluating the different
models used.
Enhancing the organizational performance (financial and nonfinancial) of
the organization in which SMA or cost-plus techniques are used.
Exploration the Egyptian environment and which techniques are prevailing
in the pricing process.
1.4 Research hypotheses
Based on research problem and research objectives, and after reviewing and
evaluating the literature, the following hypotheses are formulated;
H01: SMA as a pricing technique has no significant impact on
organizational performance
H01a: SMA as a pricing technique has no significant impact on
organizational financial performance
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H01a1: Attribute costing as a SMA pricing technique has no
significant impact on organizational financial performance
H01a2: TC as a pricing technique of SMA has no significant impact on
organizational financial performance
H01b: SMA as a pricing technique has no significant impact on
organizational nonfinancial performance
H01b1: Attribute costing as a SMA pricing technique has no
significant impact on organizational non-
financial performance
H01b2: TC as a pricing technique of SMA has no significant impact on
organizational non-financial performance
H02: Cost-plus for pricing has no significant impact on organizational
performance
H02a: Cost-plus for pricing has no significant impact
on organizational financial performance
H02b: Cost-plus for pricing has no significant impact
on organizational non-financial performance
H03: Contextual variables have no significant impact on organizational
performance using SMA as a pricing technique
H03a: Size has no significant impact on organizational performance
using SMA as a pricing technique
H03b: Strategy for pricing has no significant impact on organizational
performance usin g SMA as a pricing technique
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H03c: Kind of activity for pricing has no significant impact on
organizational performance using SMA as a pricing technique
H04: Contextual variables have no significant impact on organizational
performance using Cost-plus as a pricing technique
H04a: Size has no significant impact on organizational performance
using Cost-plus as a pricing technique
H04b: Strategy has no significant impact on organizational
performance using Cost-plus as a pricing technique
H04c: Kind of activity has no significant impact on organizational
performance using Cost-plus as a pricing technique
1.5 Research design and method
Quantitative research methods are used throughout this work. Quantitative
research is all about quantifying relationships between variables. An accurate
estimate of the relationship among variables needs a sample of hundreds or
even thousands of subjects.
The work can be considered as a scientific work that consists of three parts. The
First part includes three chapters. This part represents the theoretical part of the
thesis. Chapter two includes background of the research variables. In chapter
three the researcher addresses the literature review of the thesis. Literature
review is classified into two groups. The first group is the studies addressing the
relation between SMA and organizational performance. The second group is the
studies addressing the pricing decision as a dynamic process.
The second part of the thesis represents the empirical part of the work. The
research method applied in the thesis is a survey. The research population is
the private and the public organization in Cairo and Giza governorates; the