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THE EFFECT OF COST ACCOUNTING TECHNIQUES ON PERFORMANCE OF SMES (A SURVEY OF SELECTED SMALL AND MEDIUM FIRMS)

CHAPTER ONE

INTRODUCTION

Background of the Study

The business environment has become intensively dynamic and increasingly unpredictable in recent decades and,correspondingly, managing company has become more demanding. Cost Accounting is a task of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. The SMEs sector has been recognized worldwide for its role in economic advancement through ways various like; wealth generation, employment creation, and poverty reduction (Kithae, Gakure, & Munyao, 2012). Small and medium scale enterprises are a fundamental part of the economic fabric in most developing countries, and they play a very important role in furthering growth, innovation and prosperity (Dalberg, 2011).

Small and Medium Enterprises are critical to the development of any economy has they possess great potentials for employment generation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large scale industries. Cost accounting is a task of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

In Nigeria there has been gross under-development of SMEs sub-sector and this has undermined its contribution to economic growth and development. The key issue affecting the SMEs can be group into four: unfriendly business environment, poor funding, low management skill and lack of access to technology (FSS 2020 SME Sector Report, 2007). Small and medium enterprises (SMEs) play an important role in the development of a nation’s economy. The reasons for this are the fact that SMEs provide benefits such as job creations, knowledge spillover, economic multipliers, innovations driver and cluster development in an economy (Chinaemerem & Anthony, 2012). Given the importance of SMEs in an economy, it becomes quite plausible to look at factors affecting their financial performance which is a major determinant of their survival and growth.

An accounting system is an orderly, efficient scheme for providing accurate financial information and controls. Regulatory requirements and internal administration policies are key considerations in the design of an effective accounting system. Thus accounting systems show the books, records, voucher, and files and related supporting data resulting from the application of the accounting process. It involves the design of documents and transactions flow through an organization. The uniqueness of small and medium scale businesses call for careful consideration in the design of accounting systems.Small and medium scale enterprises are a vast majority of businesses found in variety of primary and intermediate production of the economy. These establishments have tremendous impact on the state and well being of the nation in employment generation, as sources of national outputs and revenues, providing feedstock for large corporations They may lack the sophistication to apply the detailed accounting processes, yet the value of accounting systems to these businesses is quite profound.

1.2   Statement of the Problem

Most of the existing research literature on accounting in Port Harcourt SMEs tends to be more biased toward the arm of cost accounting techniques in performance of SMEs, more so only remote exists in regard of the adoption of cost accounting techniques by SMEs in Port Harcourt [(Wairegi, 2011),(Makau, Wawire, & Ofafa, 2013), (Waweru, 2012), (Mugambi, 2010) (Aduda, Mogutu, & Githinji, 2012) , lack of technical skills are as much obstacles to developing a small business as is the inability to access credit (Mbogo, 2011). In Nigeria, SMEs cover the entire range of economic activity within all sectors and share a number of common problems that hinder them from effective performance in Port Harcourt, include low market access to credit, poor information flow, discriminatory legislation, poor access to land, weak linkages among different sectors, weak operating capabilities in terms of skills, lack of knowledge and attitudes, lack of infrastructural facilities among others.

Another problems of SMEs failure is poor management ability which includes accounting problem-solving.Small and medium enterprise experiences difficulties in raising equity capital from the finance houses or individuals. Even when the finance house agrees to provide equity capital, the conditions are always dreadful. All these result to inadequate capital available to the sector and thus lead to poor financing. Another problems facing SMES is Lack of competent management which is the consequence of inability of owners to employ the services of experts; Use of obsolete equipment and methods of production because of owner’s inability to access new technology; Excessive competition which resulted from sales which is a consequence of poor finance to cope with increased competition in the industry; The high cost of available raw materials affects the prices of good food. This only has adverse affect on the turnover of the enterprise but also on the profitability; The availability of infrastructural facilities is grossly inadequate in the areas of access roads, electricity, water supply, etc. and Multiplicity of policies and regulatory measures such as removal of fuel subsidy, taxes, several charges on loans.

The place of sound accounting and internal control systems in any business, irrespective of its scale, cannot be overemphasized. A vast majority of small-scale businesses cannot afford the complexity of a detailed accounting system even if they would have. Hence, the existence of single entries in their books and in some cases incomplete records (Wood, 1979; Onaolapo, et al., 2011). Audits of small and medium scale enterprises have proven to be among the most worrisome for professional accountants because of the inadequacy of the internal controls. This study thus sought to assess the determining factors and the adoption levels of modern accounting techniques by SMEs in Port Harcourt.

1.3   Purpose  of the Study

The purpose of these study is to examine the effect of cost accounting techniques on performance of SMEs  in selected SMEs firms in Port Harcourt. Specific objectives include, to:

i. To investigate the types of accounting records being kept and maintained by SMEs.

ii) To evaluate factors hindering Cost accounting Techniques in SMEs in Port Harcourt.

iii. To investigate the extent to which accountinginformation is being used in measuring financialperformance by SMEs.

1.4   Research Questions

i.  What are the types of accounting records being kept and maintained by SMEs?

ii)  What are the factors hindering Cost accounting Techniques and SMEs in Port Harcourt.

iii. How does accounting information being used in measuring financial performance by SMEs in Port Harcourt?

1.5   Research Hypotheses

HO1. There is no significant relationship between types of accounting records being kept and maintained by SMEs.

HO2 There is no significant relationship between the factors hindering Cost accounting Techniques and SMEs in Port Harcourt.

HO3 There is no significant relationship between accounting information being used in measuring financial performance by SMEs in Port Harcourt.

1.6   Significance of study

The effect of Cost Accounting Techniques  and performance Small and Medium Enterprise development has been an area of intense research both in practice and academia. This work is to prove helpful to existing and potential entrepreneur of SMEs since this study lends assistance in strategic effect of sources of finance in the performance of a business in order to plan ahead. The research work could also serve as a source of future reference to future researchers who may find it helpful in carrying out a research work of similar nature or related topic.

This empirical investigation of SMEs is therefore a significant contribution to existing literature. Furthermore, the study would  provides evidence on the extent to which Rivers state Small and Medium Enterprise are accounting accommodating in readiness for gaining strategic competitive advantages in their businesses. The study would also provides uniqueness of small and medium scale businesses call for careful consideration in the design of accounting systems. Small and medium scale enterprises are a vast  majority of businesses found in variety of primary and intermediate production of the economy.

1.7   Scope of the Study

The general scope of this study covers Cost Accounting Techniques and performance Small and Medium Enterprise. The geographical scope is Rivers State of Nigeria. The study will be limited to selected SMEs in Port Harcourt.

1.8    Definition of Terms

Accounting: The bookkeeping methods involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, and operating results of a business.

SME:small and medium enterprises) are businesses whose personnel numbers fall below certain limits.

Cost accounting: Is ‘the process of accounting for cost from the point at which expenditure is incurred or committed to establishment of its ultimate relationship with cost centres and cost units.

Technique: a way of doing something by using special knowledge or skill

Accounting records are all of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews.

Financial performance: Measuring the results of a firm's policies and operations in monetaryterms.