Management Accounting in Emerging Economies
In the yesteryears, the research on management accounting techniques employed in the emerging economies has been increasing tremendously. Surprisingly, the management accounting research on those nations has been labeled as esoteric regardless of numerous people living in the less developed world. However, as much as the management accounting methodologies have been disputed, the accounting needs of the people in the less developed world are as important as those in the developed world (Hopper et al., 2009, p. 1). The change of perception towards the developing world has heightened the adoption of appropriate and effective management accounting techniques in the less developed nations. Additionally, the growth of management accounting techniques in the developing world has grown due to structural adjustment programs, competition, and internationalization of the capital markets. The common management accounting approaches used in less developed world comprise of Activity Based Costing (ABC), Balanced Scorecard, Budgeting Costing, Environmental Accounting, Product Pricing and others. This paper explores effective management accounting methods used in the emerging economies with the focus on China, Malaysia, and South Africa as emerging economies. However, before assessing the chosen three countries management accounting techniques; this paper carries out an overall overview of the critical factors facing the implementation of accounting techniques in the less developed countries with reference to the Jordanian industrial companies’ case study.According to Nassar, et al. (2013, p. 18) ABC is the most appropriate management accounting technique that is suitable for industrial companies in Jordan. In the research, Nassar, et al. (2013) wanted to determine the factors that facilitated ABC implementation among the industrial companies in the country. This was because just like any other less developed nation, Jordan was likely to face several challenges. The authors found that the key features that influenced ABC adoption comprised adequate and effective training. Secondly, factors such as increased product variants and overhead costs that calls for the application of the Activity-based Costing. However, the study by the three scholars established that for the technique to be applied among the industrial companies in the country there was a need to have speed up processes, facilitate the users and motivate them in order to use the accounting technique. The biggest barrier to implement ABC in the Jordanian context were found to be inadequate computer personnel time, high consultation costs and high costing of implementing the technique. However, despite that it was a bit challenging in implementing ABC in the country, Nassar and his colleagues concluded that the ABC technique was effective in the Jordanian context. This is because of the increasing accounting management factors that called for the need to have ABC as the accounting management methodology.
The Chinese economy is quite developed than other emerging economies. Therefore, the number of management accounting tools used by the business organizations in the country is quite high. The key roles of management accounting methodologies in Chinese context include serving both the enterprise and administrative institution needs (Kouqing et al., 2014, p. 11). In these two areas, the accounting techniques are always used to meet corporate internal management needs. The management uses accounting management tools in four main areas; controlling costs, decision-making, integrating operational and fiancé activities and assessing the accounting information. The findings indicate that more joint ventures use management accounting in the business operations than the state-owned businesses (Kouqing et al., 2014, p. 11). This is an indication that the use of management accounting tools in the less developed nations has been largely impacted by the developed economies. This observation matches with Nassar, et al. (2013, p. 22) that for the less developed countries to embrace the usage of management accounting, the catalytic factors must be employed. According to Kouqing, et al. (2014, p. 12) the management accounting techniques used widely by the Chinese firm and industries comprise of ABC, Balanced Scorecard, and Environmental accounting. Although there are other management accounting methods used in the country, the three provided by Kouqing et al. (2014) are largely used by the business enterprises both in the private and public sector.
Just like the Jordanian case, the application of Activity-based costing in China faced several challenges. Kouqing et al. (2014, p. 13) used a state-owned bank to determine how the ABC technique was applied to the enterprises operating in the country. The researchers used an example of the bank because banking system involves some saving accounts which lead to the complicated classification of the crucial baking elements. Therefore, there was a need to have in place classification standards to help in the maintenance of the saving accounts. As the standard classification becomes detailed, other elements such as performance development and design also become complex calling for the need to have them divided into small segments. First, the researchers used one bank product to investigate whether the model was effective before applying in other areas. The technique was successfully applied in institutions and departments and therefore, making it effective in other areas such as capital management, risk management, and customer accounting. Besides, the internal bank controls called for the establishment of supervisory techniques to effectively hedge the potential risks and promote operational management. The achievement of these objectives depended on the enhancement and application of an effective management methodology, Activity-based costing technique.Apart from Activity-based costing, Balanced Scorecard is another accounting technique that has dominated management accounting among the Chinese business enterprises. Ideally, the Balanced Scorecard is viewed as the tool for evaluating the organizational performance (Lin et al., 2015, p. 2). However, in the Chinese context, the balanced scored card is applied in the four major areas: internal operations procedures, customers, finance, and learning. A number of Chinese enterprises have adopted the Balanced Scorecard, but they are still at the key stages of the application as noted by (Kouqing et al., 2014, p. 13). This means that the Chinese business organizations have not fully adopted the application of Balanced Scorecard in the facilitation of the strategy execution. However, the study by Zeng & Xiaohui (2013, p. 612) showed that Balanced Scorecard in the country is widely utilized by non-profit and for-profit organizations both at the company headquarters and subsidiary levels. Governments were found to use Balanced Scorecard as well. The major non-profit organizations found to embrace the Balanced-Scorecard approach are hospitals as outlined by Lin, et al. (2015, p. 2) on their study to determine the performance impacts of using Balanced Scorecard on their adoption among hospital administrations in China.
Environmental accounting is quite used in the Chinese business context, especially by the foreign enterprises. According to Kouqing, et al., (2014, p. 14) environmental accounting helps in estimating the cost of environmental protection, benefits, pollutions and the measures that have been taken by the companies to protect and develop the environment. This accounting style enables the enterprise to assess its impacts on the environment in reference to its financial results. In China, this accounting style is a legal requirement. However, it has been difficult for the foreign enterprises to adopt environmental accounting due to a number of factors. First, the implementation of this method is very costly and therefore, it increases the company management cost. Secondly, it requires the company planning to use the environmental accounting technique to have a framework in place that can support both external and internal environment. Thirdly, the attitude of employees has made it hard to have this technique applied in the country. For example, in the cases where employees are not willing to cooperate in the implementation of the environmental accounting, the company finds it difficult to use the methodology (Kouqing et al., 2014, p. 14). However, the use environmental accounting among the foreign companies in China is very effective because through the government’s prerequisite regulatory framework they are made accountable for the damages they cause to the environment.
Malaysia is another developing country in which the application of management accounting techniques have increased steadily since it shifted from the central-based economy to the market-oriented economy (Anh, 2012, p. 1). The business-oriented economy is more competitive hence, forcing the enterprises to adopt an accounting system that does not only serve the interests of the tax authorities by also the organizational management needs. To determine the effective management accounting techniques used in the country, Dung & Aoki (2014, p. 167) conducted a research to investigate management accounting approaches employed by the food and beverage enterprise in Vietnam. The two researchers found that the common management accounting employed by the enterprises in food and beverage industry comprised of costing systems, budget costing and product pricing system. This paper explores the applicability of each practice.
The costing system was largely focused on the Activity-based costing whereby the enterprises measured the costs associable with each activity. The identifiable costs comprised of direct material cost, direct labor cost, administration costs, customer service cost, manufacturing cost and selling cost. In the efforts to control cost Dung & Aoki (2014, p. 178) judged that cost classification among the enterprises was mainly based on the cost behavior. The researchers established that 41 percent of the enterprises in food and beverage industry in the country had classified their costs as mixed cost, fixed cost, and variable cost. However, the researchers were amazed to notice that almost half (48 percent) of the enterprises did not embrace the concept of cost classification. On the type of cost classification, Dung & Aoki (2014, p. 178) observed that about 76 percent of the enterprises classified production cost into both indirect and direct production costs. The classification of costs based on this methodology was clear proof that the enterprises acknowledged the importance and effectiveness of allocating costs to the objects. The allocation of costs to the activities was helpful in providing information essential for several management needs such as profitability analysis, product pricing and product costing.
About 59. 3 percent of the Vietnamese enterprises used direct material cost approach to assign manufacturing overhead costs. This strategy was effective because the major cost item in the food and beverage industry is direct material cost. The procedure of allocating manufacturing overhead cost was also effective since the manufacturing overhead costs are influenced by direct material costs (Dung & Aoki, 2014, p. 178). The authors also noted that 24.1 percent of the business used a number of allocation bases to assign manufacturing overhead costs. This was strong evidence that businesses became aware of the possibility to have several cost drivers apart from the direct material costs. Therefore, for the enterprises in food and beverage industry, it was essential to use several cost drivers to determine the actual product cost. This could only be achieved through the application of the activity-based costing as the management accounting method.
Dung & Aoki (2014, p. 179) judged that budget costing was the management accounting approach widely practiced in both developed and emerging economies. The survey by these two researchers concluded that there was huge applicability of budget costing among the Vietnamese enterprise for particular items. For example, the researchers found 72.2 percent of the companies to have used cost budgeting to direct material budget, product budget, administration budget, and goods sold cost budget. The respondents from the enterprise as Dung & Aoki (2014, p. 179) point out were meant to meet the management needs. The 53.7 percent of the enterprise was found to frequently use budgeted cost as the strategy of controlling the costs. Among the enterprises using the budgeted cost to control their costs, 47 percent acknowledged that budgeted cost systems were effective while 53 percent of them point out that the budgeted costs were less effective compared to their expectations. To prove on the effectiveness of budget costing practice, the researcher survey also requested the respondents to indicate whether they used variance analysis to determine the difference between the budgeted cost and the actual cost and 53 percent of the companies admitted to using the variance analysis. Therefore, it is conclusive that budget costing system was effective for the enterprise in Vietnam. This is because, through this management accounting technique, the management was able to satisfy some of the management requirements such as cost control.
Thirdly, product pricing approach was applied to determine the pricing processes among the businesses in the food and beverage industry. The 74.1 percent of the businesses used cost base and expected profits to determine the product pricing strategy. The other factors that determined the pricing of the products comprised of the type of the product, product lifecycle, and competitors’ price. Only 37.3 percent of the businesses that believed product pricing should be based on the price the customers were able and willing to pay (Dung & Aoki, 2014, p. 180). Based on the percentage of the enterprises that had embraced the product price approach it is evident that this management accounting methodology was very effective in helping companies to execute operational functions.
As noted earlier the use of management accounting in Vietnam was influenced by the transition of the country’s economy from central one to the market-oriented one. Anh (2016, p. 68) noted that the application of accounting management practices in the country had been influenced by decentralization of economy and competition in business. Anh (2016, p. 68) found that the influence of economic decentralization and competition positively affected the use of management accounting practices in the country. Although these factors had no positive impact on the business’s performance, they were very effective in mediating the performance of the management accounting practices that aided the performance of the enterprises. Therefore, the author concluded that the Vietnamese companies facing stiff competition are justified to employ management accounting practices to promote their industry and market performance. Besides, Anh noted that managers operating enterprises in the decentralized economy needed management tools such as accounting management techniques to execute key managerial responsibilities such as controlling and planning for activities. In concluding Anh (2016, p. 169) recommended that Vietnamese enterprises should embrace the use of management accounting practices because they improved both the company non-financial and financial performance.Thirdly, South Africa is an example of the emerging economy where management accounting methods; ABC and Balanced Scorecard are very effective in both the privately owned enterprise and government agencies. The study by Oseifuah (2014, p. 581) 2016 found that Activity-based costing was very beneficial in the public sector. According to Oseifuah (2014, p. 581), the public sector involves a lot of overhead-intensive services agencies and therefore, calling for the application of ABC. The author established that the use ABC in the public sector was effective in providing the government agencies with information needed to make strategic decisions. The adoption of ABC in government agencies was influenced by the increase of protests from the public demanding too high quality and better service delivery (Oseifuah, 2014, p. 581). In order to solve these conflicts, the country’s Auditor General recommended for the adoption of Activity-based costing to resolve inefficient management of the taxpayers’ money, especially by the municipalities.
The ABC in the South African context is also applied in the private sector, especially by the private healthcare providers in the country as studied by (Botha & Toit, 2017, p. 338). The adoption of ABC in this industry was largely influenced by frequent price reforms and the implementation of the National Health Insurance in the country that affected each healthcare industry profitability. As a result, the healthcare management in the private sector were forced to look for other alternatives to help them understand the correlation between the cost driver activities and their correspondent costs. These changes led the healthcare administration switch to ABC as the management accounting technique which could help them to establish relationships between activities and their costs. This was the actual benefit that healthcare managers to employ ABC as the accounting management tool. However, just like the Jordanian case, the implementation of ABC in South Africa faced a number of challenges (Botha & Toit, 2017, p. 342). First, it was hard to correlate ABC with the healthcare information systems. Secondly, the industry lacked sufficient computer support in the implementation of the system. Thirdly, it was hard to select cost drivers in the healthcare sector. Fourth, the healthcare organizations lacked sufficient resources to implement the accounting management methodology effectively.
The private healthcare sector in South Africa also uses the Balanced Scorecard in strategic management and planning (Botha & Toit, 2017, p. 342). The Balanced Scorecard helps the management to align business processes in accordance with the organizational strategy and vision. In the South African context, this methodology is not applied in the private sector but also in the public sector and non-profit organizations as well. In the healthcare sector, the management used the balanced scorecard in addition to ABC to streamline the operations and activities of the organizations (Botha & Toit, 2017, p. 342). The combination of ABC and Balanced Scorecard makes sure that organizations carry out their operations in line with the laid down strategies and visions through by using the lowest cost possible.
Contrarily to the previous perception towards the use of accounting management techniques in the emerging economies, the increased management needs in these economies have influenced the application of several accounting management tools unlike decades ago. The analysis in this paper depicts that accounting management tools and practices; ABC, Balanced Scorecard, environmental accounting, budget costing and product pricing systems have been widely used in the less developed nations. The use of these accounting tools takes place both in the private and public sector. This paper has found that these accounting techniques are effective in these economies because they help managers to address organizational management needs and as a result improve the performance of the organizations.