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THE ROLE OF ACCOUNTING INFORMATION IN PRODUCTION DECISION – MAKING

ABSTRACT

Managers make decision in order to choose from alternative course of action at a dynamic rate. This is done in order to achieve the set objectives of the firms in which they manage. To make these decisions, accounting information are used as a necessary guide. Manufacturing firms make use of accounting information which have been complied from source documents, records and statement in accordance with systems. These information gathered are used to make effective production decisions which would achieve the objectives of profit maximization cost minimization, Production efficiency, proper resources allocation etc. This study is aimed at discovering the quantitative attributes to accounting information which makes it an effective tool in the production decision-making and if the information generated is utilized in effective manner. Although, it is evident that decisions made in manufacturing firms are determined by the accounting information to a varying extent. It is hoped that the recommendations will show the importance of accounting information and that managers who make decision will comprehend it as a vital necessity in decision – making.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Manufacturing firms in the present economy have to contend with a lot of economic variables which have been aimed at consolidating the gains of structure (adjustment programmes (S A P) since the first step introduced by SAP was self reliance, most manufacturing forms have had to consider the local sourcing of raw materials instead of the dependency on imported materials for their production processes. Other factors such as inflation, taxation, instability both economic and political, competition and market forces have caused a change in the out look of production.

          In order to achieve their objectives the manufacturing firms have to make concise decision which would be relevant to the restricting of production processes and in profit maximization so as to survive in our ever- changing economy and competitive environment. It is necessary to note that in making a decisions, information is very essential especially that of accounting.

          Information is the life line of any organization it is the general meaning that is assigned to data by means of the conditions used in their representation defined by Don. T Coster et al (1978).

          Accounting information measures the progress of a commercial enterprise and is used in decision making for the selection of a singly course of action from several dissimilar and unrelated alternative.

          Many production, marketing and government executives are stronger managers when they have solid accounting information backing decision making. They are able to plan and control the operations of their organizations with which they set their objectives.

          This study is about the role of accounting information in production decision – making. It seeks to enquire to how financial information can help the production processes of firms through show and long term decision by management

THE USERS OF ACCOUNTING INFORMATION:

          Accounting is an information system designed to communicate meaningful economic information about a business firm on an entity to interested parties (Davidson, 1970).

          The users are of two categories:

The management requires information on to assist them in decision-making and control activities. The decisions made are as regards operations such as planning, production, marketing and pricing including other activities. The role of accounting information is set towards the efficient production of goods and services which are used to maximize the benefit of both manufacturer and consumers.

          The employers requires the information on the ability of the firm to meet wage demands, for the assurance of steady employment and the frequency of participation in company bonus profit sharing taxation and pension plans.

          The external users comprise of  the share –holders who use the information to assess the value of their investments provided the firm is a limited liability company. Also, the creditors, suppliers and providers of loan capital require the information on the firms’ ability to meet financial and debt obligations. The parties mentioned above, are those who provide the capital as owners or lenders to the firm.

          The government is an external user which collects the accounting information in order to know the assessable profits that are subject to tax and other governmental agencies as the federal office of statistics for details of sales activity, investment, stocks, dividends paid and figure required for the computation of the gross domestic product (GDP).

          Finally, Financial analysts use the accounting information to know the level of investment they would advise their client Investor to put into any company and whether they will yield high profits, with less risks. Information will also be used by the security exchange commission (SEC) to knew if the company will perform or not in the stock exchange.

          In this study, the emphasis will be laid on the management’s need for accounting information as it concerns production so as to make effective decisions that will in achieving the objectives of the firm.

DECISIONS AND MANAGEMENT

          It is necessary to know that many manufacturing firms are striving hard to achieve optimum production and maximize their contribution margin in order to break even and attain some level of profit at low costs.

          Business decision are made in order to carry out the above objectives and are done only after all alternative source of action have been considered but possible courses  of  action have been considered but possible courses of action cannot be evaluated properly unless information is available as to the consequences of those choices.

          Production management decision are based on two categories:- planning and control Henni Fayol (1990) defined planning as the determination in advance, of a business programme or management to undertake or pursue some programme which is considered in advance.

          It involves forecasting and estimation by means of budgeting and should provide answers to such questions as “what does the firm desire to product?” and “when and how are the objectives to be accomplished”?

          However, Anderson, (1990) defined controlling as the way of checking current performance against predetermined standards and targets contained in the plans with a view to ensuring adequate process and satisfactory performance whether physical or financial, also contributing to decision in continuing or changing the plans, as well recording the experience gained from the working of these plans as a guide to possible future operations.

          Here, the study is on the role of accounting in production decision making. Manufacturing firms are the main target because they produce goods and expand production in order to increase output and quality in order to meet the customers demand and specifications.

          Although, accounting information is used extensively by managers. It is important to note that it does not give automatic answers to the problems faced by the managers values and knowledge which are brought into decision-making cannot be subjected to any units quantitative analysis

          Finally, it is management accounting information that is provided to manager to help them make good decision within the firm’s set goals. However, information which is available will effect the perceptions of the decision deffer when there is a presence of it.

          The effectiveness of accounting information is determined b y the manner in which it affects behaviours. Thus, unless accounting information serves to produce the desired action, it has served no purpose at all.

          Phinomar Nigeria limited was fully incorporated in 1979, it was wholly owned by the Ayalogu family with his Royal Highness, Igwe I. O. U Ayalogu as the chairman and managing Director. The company had it headquarters at algwo in Udi Local Government area of Enugu state. The company was started by Igwe with a small mud oven and twelve birds as a hobby. In 1963 through the advice of a British salesman and a friend, the lgwe increased in the poultry area. The company has since developed tremendously and has grown with groups, namely:-

The company has since the organization and frictional structure the organizational and functional structure of the company has the Board of Directors at the apex, then the managing Director, General manager and the Deputy General manager, below the Deputy General manager are the officers of the company on the same horizontal line in charge of the Account department, who is in charge of the accounts department, the internal Auditor takes care of the Audit departments, the Human Resources department and the general secretary of the company is the head of the public relations department.

          Further down the line but on the game horizontal line are the production manger, sales manger and marketing manager in charge of the production department sales, department and marketing department respectively. The last on the chart are the manual labourers who make up the majority of the staff strength and their services are of paramount importance of the company

1.2     STATEMENT FO THE PROBLEM

 Due to the state of our economy and various government polices managers also have to choose from the alternatives, the course of action which would be conductive for production in order to face the challenges of the changing economy so as to achieve their set goals and objectives which boils down to profit planning and maximization.

The major problems  emanating from above are:-

1.       To what extent do managers in manufacturing firms or companies make use of accounting information, consciously and effectively in decision making, especially that of production?

2.       Does the use of such information lead to cost minimization and the proper allocation of resources?

3.       Does the decision made with particular reference to accounting information improve production efficiency?

4.       Have the firms any problem in providing and utilizing accounting information and how can problem be solved?

1.3     OBJECTIVE OF THE STUDY

The study has the following objective:-

1.       TO ascertain if they have identifiable means of providing accounting information and the quality of such information.

2.       To determine whether information generated are effectively utilized in the production decision in manufacturing forms.

3.       To determine the extent which the information fulfill the basic roles of cost minimization, proper allocation of resources and improvement in the production efficiency.

4.       To ascertain whether there are problems in generating and utilizing the information necessary for production decision and to suggest possible solutions to the problems.

1.4     THE SIGNIFICANCE OF STUDY

The study is to show the role of accounting information in production decision making in manufacturing firms. The use of accounting information is essential to manufacturing firms in that the resultant effects of the use will enhance profit maximization reduce cost of production, increase productivity and the general progress of the firms.

The decision making process will be achieved better when accounting information is used, choosing the alternative course of action and this is done by the use of decision models.

The beneficiaries of the resultant effects of the decision are the employer the firm as a whole, the government and other groups affected by production decisions. The employers will benefit because high productivity and profit maximization derived from the effective decisions may bring about increase in salaries, creation of incentives and motivation of the employees.

The firms will benefit because where the decisions are enhanced by the accounting information generated, the objectives of the firm which have been set out will be achieved. As such, profit and high returns will be reaped by the firm.

Also, the government will benefit from the results in that it can affect government policies concerning the manufacturing sector of the economy.

Finally, the study will be beneficial to those who need the information for literature enrichment of the subject such as managers, investors and those interested accounting information and role its plays in production decision making.

1.5     RESEARCH HYPOTHESIS

HI:     The accounting information generated in manufacturing firm is utilized.Effectively in production decision

HO:   The accounting information generated in manufacturing firms is not utilized Effectively in production decision

H2:    Accounting information generated in manufacturing firm is relevant for the production decision making.

HO:   Accounting information generated in manufacturing firms is not relevant for the production decision making.

1.6     SCOPE AND DELIMITATION OF THE STUDY

Accounting information is used in various areas of decision-making such as pricing, production, sales capital investments, expansion and planning.

However, the study has its scope limited to production decision-making due to various constraints.

Time was a major constraint which was not sufficient to cover the various areas of decision-making.

It was not available to cover all the firms in Enugu, therefore one company was chose in order to carry out the research which is phinomar Nigeria Plc.

Another constraint was the non- availability materials were put to valuable use in order to carry out the research. Also, it was found that obtaining accounting information in the firms was difficult but by suing questionnaires, the researcher was able to get certain information which would not have been disclosed.

1.7     DEFINITION OF TERMS

1.    Inflation – Is a continuous rise in price of goods and services.

2.    Taxation- Is a system whereby individuals and firms make compulsory levy to the government on periodic basis.

3.   Assessable Profit- Is the amount of adjusted profit of that period after deducting:-

a.       The amount of any loss incurred by the company during any accounting period

b.       Gross forward loss or unrelieved loss.

4.      GDP – (Gross Domestic Product) is the total value of all final goods and services produced in Nigeria by all the citizens living in Nigeria including (British, America Japanese, Ghanian etc) using their factor of production.

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