Management accounting practices in the UK food and drinks industry

Transcription

1 Research Report Management accounting practices in the UK food and drinks industry Magdy Abdel-Kader University of Essex Robert Luther University of the West of England, Bristol

2 Copyright CIMA 2006 First published in 2006 by: The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP Printed in Great Britain The publishers of this document consider that it is a worthwhile contribution to discussion, without necessarily sharing the views expressed. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publishers. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means method or device, electronic (whether now or hereafter known or developed), mechanical, photocopying, recorded or otherwise, without the prior permission of the publishers. Translation requests should be submitted to CIMA.

3 1 Management accounting practices in the UK food and drinks industry Acknowledgements We would like to express our gratitude to CIMA (the Chartered Institute of Management Accountants) for funding the research project on which this report is based. We would also like to thank all the people who helped in many stages of this research. Our special thanks go to the food and drink industry managers interviewed and all those who responded to the questionnaires.

4 2 Management accounting practices Contents Executive summary Management accounting evolution The nature and structure of the study Findings and implications Introduction Stage 1. Cost determination and financial control Stage 2. Provision of information for management planning and control Stage 3. Reduction of resource waste in business processes Stage 4. Creation of value through effective resources use Research objective and method Outline of the report Industry context, related studies and research questions addressed Empirical research design Data collection method Sample frame and size The questionnaire design Responses to questionnaire Evaluation of non-response bias Measurement of contingent variables Survey findings concerning the use and importance of management accounting practices Costing systems Budgeting Performance evaluation Information for decision-making Strategic analysis Communication of management accounting information A taxonomy of management accounting systems and the classification of respondent companies Discussion of levels of importance, usage and emphasis Classification of firms into management accounting evolution stages... 23

5 Management accounting practices Contents 3 6. Survey findings concerning the effect of explanatory factors on management accounting practices External factors Perceived environmental uncertainty (PEU) Customers power Organisational factors Competitive strategy Firm structure decentralisation Size Processing factors Complexity of processing system Advanced manufacturing technology (AMT) Total quality management (TQM) Just in time (JIT) Product perishability Summary and conclusions Limitations of the study Management accounting practices (MAPs) The level of evolution of management accounting in UK food and drink firms Relationships between management accounting sophistication and contingent factors Implications Bibliography

6 4 Management accounting practices Executive summary Management accounting evolution Since the early 1980s a number of innovative management accounting techniques have been developed such as activity-based techniques (costing, budgeting and management), strategic management accounting and the balanced scorecard. It is believed that these new techniques have been introduced to overcome a claim that outdated management accounting practices had provided misleading information for planning, controlling, decision making and communication. Changes in the business environment have almost always been cited as the impetus for firms to implement more advanced practices and adapt their management accounting systems. The International Federation of Accountants (IFAC) (in its statement on Management Accounting Concepts) describes the development of management accounting as an evolution in four stages: Stage 1 (pre-1950) cost determination and financial control. Stage 2 (by 1965) provision of information for management planning and control. Stage 3 (by 1985) reduction of resources waste in business process. Stage 4 (by 1995) creation of value through effective use of resources. Each stage is characterised by adopting a number of new management accounting practices (MAPs) in addition to reshaping and adaptation of the old practices to fit with the new in addressing a new set of conditions in the business environment. Much has been written about individual new MAPs throughout the 1990s and early 2000s. However, little empirical evidence exists on the actual combination of new and old MAPs in the UK. The nature and structure of the study With an annual turnover of some 70 billion, the food and drinks industry is the largest in the UK s manufacturing sector. Despite this, little is known about the specific management accounting practices employed across the industry. This study aims to report the results of a large scale empirical survey about the current usage of MAPs in the UK food and drinks industry. In particular the survey aims to explore how sophisticated MAPs across the industry are. In this context we measure the sophistication as a move towards the implementation of MAPs related to the latest stage of management accounting evolution. The study also reports on how MAPs are influenced by three groups of contingent factors. These are: External factors (perceived environmental uncertainty and customers power). Organisational factors (competitive strategy, decentralisation and firm s size). Processing factors (complexity of processing system, product perishability, total quality management, just-in-time system, and advanced manufacturing technology). The report comprises seven chapters. The first chapter gives background to the research project and its aims. Previous literature is reviewed in the second chapter and two research questions are articulated. In Chapter 3 the design of the empirical study is described. Management accounting practices employed by responding food and drinks companies are summarised in Chapter 4 while the classification of companies into the four stages of management accounting evolution is undertaken in Chapter 5. In Chapter 6 we investigate the relationship between the level of MAPs sophistication and the three groups of contingent factors. The last chapter summarises the findings and considers their implications.

7 Management accounting practices Executive summary 5 Findings and implications Our findings are based on analysis of 245 questionnaires completed by management accountants and production managers. The food and drink processing companies to which these respondents are attached have a range of characteristics including: An average value of total assets of 27.5 million but wide dispersion around that. A moderately high level of perceived environmental uncertainty. Being part of a value chain in which their customers, often supermarkets, have considerable power. Tending, on the spectrum of competitive strategy, towards product differentiation rather than cost leadership. This is supported by a high level of product diversity and complexity. A moderately high level of monitoring and control of quality. No strong evidence of decentralisation and delegation or of the application of advanced (automated) manufacturing (processing) technologies. A high level of perishability of product which corresponds with moderately high engagement with JIT. Analysis of the accounting practices suggests that the management accounting systems employed in many food and drinks companies are not particularly sophisticated. When cluster analysis is applied to group respondent firms according to their scores on the four stages of management accounting sophistication 19% of firms were found to be in Stage 1 of evolution, 41% in Stage 2, 30% in Stage 3 and only 13% in Stage 4. We conclude that management accounting systems in many UK food and drinks companies are moving, but only slowly, from a simple or naive role of cost determination and financial control towards a more sophisticated role of creation of value through effective resource use. Budgeting, product profitability and financial performance measurement remain the central pillars 98% of companies use budgeting for planning, 97% use budgeting for cost control, 97% do product profitability analyses, and 93% apply financial measures in performance evaluation. At the other end of the scale some of the newer management accounting practices are less widely used than might be assumed from a reading of the textbooks; for instance 55% of companies have never used activity-based costing, 63% have never used EVA or residual income, and 37% have never used DCF. Taking the industry as a whole, there is little evidence of management accounting directly connected with value creation. There are however indications that increased use may be expected of techniques relating to cost of quality information, non-financial measures relating to employees, and the analysis of competitors strengths and weaknesses. We suggest that many companies might benefit from benchmarking themselves against the MAPs in different stages of evolution and adopting those more advanced practices that are appropriate to their particular circumstances. Use of contingency theory shows that more sophisticated management accounting is positively associated with the following characteristics: size, decentralisation, powerful customers, advanced processing technology, JIT and TQM. For educators, professional bodies and society generally the implication is that the gap between what purports to be best practice and actual practice shows that there is considerable room for improved dissemination of concepts and techniques.

8 6 Management accounting practices 1. Introduction During the 1980s Kaplan, in his review of The Evolution of Management Accounting (1984) and with Johnson in the Relevance Lost book, levelled strong criticism at the management accounting practices of the day. He claimed that: Virtually all of the (management accounting) practices employed by firms today and explicated in leading cost accounting textbooks had been developed by 1925 there has been little innovation in the design and implementation of cost accounting and management accounting control systems. (Kaplan, 1984, p.390) Furthermore, it was argued 1 that the practices were inappropriate and, more specifically, that they: did not meet the needs of the contemporary manufacturing and competitive environment provided misleading information for decision-making purposes had become subservient to financial accounting requirements focused almost entirely on internal activities with little attention given to business s external environments. Since then, and perhaps in response to these criticisms, a number of innovative management accounting techniques have been developed across a range of industries. The most notable contributions are activity-based techniques which include activity-based costing, activity-based budgeting and activity-based management, strategic management accounting and the balanced scorecard. These new techniques have been designed to support modern technologies and new management processes, such as total quality management and just-in-time production systems, and the search for a competitive advantage to meet the challenge of global competition. It has been argued 2 that these new techniques have affected the whole process of management accounting (planning, controlling, decision-making, and communication) and have shifted its focus from a simple or naive role of cost determination and financial control, to a sophisticated role of creating value through the use of resources. Before exploring these shifts in the context of the food and drinks industry, we consider the development of sophistication of management accounting generally. In 1998 the International Federation of Accountants (IFAC) issued a statement describing the development of management accounting through the following four sequential stages: 1. Cost determination and financial control (pre-1950). 2. Provision of information for management planning and control (by 1965). 3. Reduction of resources waste in business process (by 1985). 4. Creation of value through effective resources use (by 1995). 1.1 Stage 1. Cost determination and financial control IFAC describes management accounting before 1950 as a technical activity necessary for the pursuit of organisational objectives. It was mainly oriented towards the determination of product cost. Production technology was relatively simple, with products going through a series of distinct processes. Labour and material costs were easily identifiable and the manufacturing processes were mainly governed by the speed of manual operations. Hence, direct labour provided a natural basis for assigning overheads to individual products. The focus on product costs was supplemented by work on budgets and financial control of production processes. Such development stemmed primarily from practical innovations by managers and engineers (Ashton, Hopper and Scapens, 1995). The strong position held by Western countries in international markets made their products highly regarded. They could be sold relatively easily, and competition on the basis of either price or quality was relatively low. There was little innovation in products or production processes as existing products sold well and the production processes were well understood. Accordingly, management was concerned primarily with internal matters, especially production capacity. The use of budgeting and cost accounting technologies was prevalent in this period. However, the dissemination of cost information tended to be slight, and its use for management decision-making poorly exploited (Ashton et al., 1995). 1.2 Stage 2. Provision of information for management planning and control In 1950s and 1960s the focus of management accounting was shifted to the provision of information for planning and control purposes. It is seen by IFAC as a management activity, but in a staff role. It involved staff (management) support to line management through the use of such technologies as decision analysis and responsibility accounting. Management controls were oriented towards manufacturing and internal administration rather than strategic and environmental considerations. Management accounting, as part of a management control system, tended to be reactive, identifying problems and actions only when deviations from the business plan took place (Ashton et al., 1995). 1 See, for example, Drury (1996). 2 See, for example, Ittner and Larcker (2001), Kaplan and Atkinson (1998), Otley, (1995), Fullerton and McWatters (2002), Hoque and Mia (2001),and Haldma and Laats (2002).

9 Management accounting practices Introduction Stage 3. Reduction of resource waste in business processes The world recession in the 1970s, following the oil price shock, and the increased global competition in the early 1980s threatened the Western established markets and led to a decline in their protected markets. The increased competition was accompanied and underpinned by a rapid technological development which affected many aspects of the industrial sector. The use, for example, of robotics and computer-controlled processes improved quality and, in many cases, reduced costs. Also developments in computers, especially the emergence of personal computers, markedly changed the nature and amount of data which can be accessed by managers. Thus the design, maintenance and interpretation of information systems became of considerable importance in effective management (Ashton et al., 1995). The challenge of meeting global competition was met by introducing new management and production techniques, and at the same time controlling costs, often through reduction of waste in resources used in business processes (IFAC, 1998). In many instances this was supported by employee empowerment. In this environment there is a need for management information, and decision making, to be diffused throughout the organisation. The challenge for management accountants, as the primary providers of this information, is to ensure through the use of process analysis and cost management technologies that appropriate information is available to support managers and employees at all levels. 1.4 Stage 4. Creation of value through effective resources use In the 1990s world-wide industry continued to face considerable uncertainty and unprecedented advances in manufacturing and information-processing technologies (Ashton et al., 1995). For example the development of the world-wide web and associated technologies led to the appearance of E-commerce. This further increased and emphasised the challenge of global competition. The focus of management accountants shifted to the generation or creation of value through the effective use of resources, through the use of technologies which examine the drivers of customer value, shareholder value, and organisational innovation (IFAC, 1998). The four stages of the evolution of management accounting described by the IFAC statement are illustrated in Figure 1. Figure 1. Evolution of management accounting Stage 4 3 Transformation Ongoing Transformation 2 Transformation 1 Transformation Cost determination and financial control Information for management planning and control Reduction of waste of resources in business processes Creation of value through effective resource use Focus Source: IFAC (1998)

10 8 Management accounting practices Introduction A critical difference in the shift between Stage 2 and Stages 3 and 4 is the change in focus away from information provision and towards resource management, in the form of waste reduction (Stage 3) and value creation (Stage 4). However, the focus on information provision of Stage 2 is not lost, but is refigured in Stages 3 and 4. Information becomes a resource, along with other organisational resources; there is a clearer focus on reducing waste (in both real and financial terms) and on leveraging resources for value creation. Accordingly, management accounting is seen in Stages 3 and 4 as an integral part of the management process, as real time information becomes available to management directly and as the distinction between staff and line management becomes blurred. The focusing of the use of resources (including information) to create value is an integral part of the management process in contemporary organisations. 1.5 Research objective and method The aim of this study is to investigate the current state of management accounting practices in the UK food and drinks industry and explore its sophistication level. In this context sophistication refers to the capability of a management accounting system to provide a broad spectrum of information relevant for planning, controlling, and decision-making all in the aim of creating or enhancing value. Increased sophistication is manifested by a move from the stage of cost determination and financial control to the stage of creation of value. We survey the perceived value of newer management accounting techniques and the extent to which they are becoming more widely used. In particular we explore whether, and to what extent, the sophistication of a management accounting system is related to the following possible explanatory variables: The UK food and drinks sector provides the context for this research. It is the largest industry sector in the UK; Mann et al. (1999b) indicate that it provides employment for over three million people from primary producers to manufacturers and retailers, and it accounts for 9% of gross domestic product. Despite this the sector is under-researched in the management accounting field. It is of particular interest because, according to Heasman and Henson (1997), the industry is over-regulated with regulations mainly related to the quality of products. On this basis we expected to find an emphasis on total quality management and an adoption of advanced manufacturing and processing techniques which may influence management accounting practices. 1.6 Outline of the report This report consists of seven chapters. The second chapter presents a brief industry context and the research questions addressed in this study. Chapter 3 describes the design of the empirical study. The survey findings related to management accounting practices in the UK food and drinks industry are summarised in Chapter 4. As this study aims to investigate the relationship between the sophistication of management accounting practices and some potential explanatory variables it was necessary to classify the responding companies into groups according the sophistication level of their management accounting practices; this classification is illustrated in Chapter 5. Chapter 6 investigates whether or not relationships exist between management accounting sophistication and external, organisational and processing factors within UK food and drinks companies. The final chapter concludes the report with a summary of the findings. external factors: environmental uncertainty; customers power organisational factors: competitive strategy; structure; size processing factors: system complexity; extent of implementation of advanced manufacturing technology; implementation of total quality management techniques; implementation of just-in-time techniques and product perishability. Previous non industry-specific studies (e.g., Chenhall (1997); Chenhall and Morris (1986); Chia (1995); Chong (1996); Chong and Chong (1997)) have found relationships between the performance of strategic business units and these factors. However, they have all investigated the relationship between the factors and performance. None has investigated the effect of management accounting practices (MAPs) on these relationships 3 or looked at them in the UK context. 3 Chenhall and Langfield-Smith (1998) examined the effect of management accounting practices, management practices and strategic priorities on SBUs performance in the context of Australian companies.

11 Management accounting practices 9 2. Industry context, related studies and research questions addressed As stated earlier, the food and drinks industry is the single largest manufacturing sector in the UK. Its turnover in 2003 was about 67.6 billion representing 15% of total manufacturing. The industry employs some 500,000 people or 13.1% of the whole UK manufacturing workforce. A total contribution of 20 billion GVA (Gross Value Added) is made to the UK economy 1. Despite its significance little attention was given to the performance of the industry until 1996 when the Food and Drinks Industry Benchmarking and Self-Assessment Initiative was launched. This initiative was managed by Leatherhead Food Research Association and supported by the Ministry of Agriculture, Fisheries and Food and the Department of Trade and Industry, aimed to improve the competitiveness of the UK food and drinks industry by increasing the awareness and use of practical business improvement techniques (Mann et al., 1999a). The self-assessment programme of the initiative aims to encourage and enable companies to assess their management systems and business performance against a European Business Excellence Model 2 (Mann and Adebanjo, 1997). The self-assessment is carried out by means of a questionnaire comprising 85 questions. By reference to 50 responses a major finding in 1997 was that only 18% of the food and drinks companies were developing their management systems along the lines of business excellence. Most were applying traditional methods of management, are not learning from the experiences of best-in-practice companies, and not applying a systematic approach to achieving business improvement. This was considered to be causing low financial returns right across the industry. Data from cross-industry companies show that food industry performed the least well (Mann and Adebanjo, 1997, p.1). It has also been concluded that the food industry needs to be more progressive and more willing to learn and apply new methods. Mann et al. (1999a) concluded that, while the food industry is strong in resource and process management, its companies have less well developed management systems than other industries (and) were not as good at meeting financial targets using appropriate non-financial indicators, and were less likely to benchmark their results. (p.18). This was partly attributed to a lower level of exposure to international competition than other industries. Likewise, Ratnatunga, Hooley and Pike (1990), on the basis of 21 in-depth interviews with senior executives in the food industry, found that almost half of the responding firms did not involve accountants in choosing alternatives in the marketing mix, and almost a quarter used them only as information providers. (p.12) Asquer (2003), in a paper about the food industry, explains that many state of the art technologies activity-based costing and management systems, for instance use a range of tools to assess operational efficiency and the achievement of organisational goals. Yet many firms are far from adopting most of these innovations. (p.28). (Mann et al. 1999a). Mann et al followed up their 1999a survey with an investigation (1999b) of the best practices employed by nine companies that scored well in the Business Excellence Model, and concluded that the industry needs to be more progressive and more willing to learn and apply new methods. In particular, companies require leaders who develop policies and strategies that really address the needs of the customer (and do not just provide what they think the customer wants) and utilise the full potential of their employees. Performance against policies and strategies needs to be monitored using a performance measurement system that addresses all the financial and non-financial measures that are critical to an organisation s success. These should include measures of customer satisfaction, employee satisfaction and impact on society. It is only by doing this that long-term financial success will be achieved. 1 Food and Drink Federation, accessed on 20 June The European Business Excellence model is divided into two groups the enablers and results. The enablers are primarily looking at how the organisation is managed, and the results look at the achievements of the organisation. This model considers the management of the organisation in terms of leadership, policy and strategy, people management, resources and processes (enablers) and then considers the results achieved in terms of customer satisfaction, people satisfaction, impact on society and business results (for more details see Mann and Adebanjo (1997)).

12 10 Management accounting practices Industry context, related studies A significant body of research has been published over the years in the field of management accounting. Aside from the very limited literature on accounting in the food sector, two streams of research are of particular relevance to this study. The first stream reports on the use of various management accounting techniques and practices; for example, Chenhall and Langfield-Smith (1998), Ghosh and Chan (1997), Guilding, Lamminmaki, and Drury, (1998), Luther and Longden (2001), Wijewardena and Zoysa (1999), Yohikawa (1994) and Drury et al. (1993). This study is informed by and extends such research. The other related stream of research has examined the relationship of characteristics of management accounting information with a range of underlying (or contingent) factors. This type of research is broadly based on contingency theory, which has been applied as a means of explaining variations in the management accounting practices adopted by different organisations. Its premise is that there is no unique set of management accounting practices that suits all organisations; different organisations will adopt a particular set of management accounting practices which is appropriate to their circumstances. The idea attracted many researchers 3 to attempt to identify the most important contingencies and to assess their impact on the design of management accounting systems. Three main categories of factors can be identified from the extant literature. These categories are shown below together with some of the most important individual component factors: external factors: environmental uncertainty organisational factors: competitive strategies, structure (decentralisation), firm s size manufacturing or processing factors: system complexity, advanced manufacturing technology, the implementation of total quality management or of just-in-time. Our study is distinguished from earlier contingency studies in several ways. First, our emphasis is on individual management accounting practices as outcomes, rather than on broad characteristics of management accounting information such as scope or timeliness. Secondly, we consider the contingency-type associations in the context of UK companies. Previous research has not investigated the relationship between the explanatory factors and management accounting practices in the UK. Our in-depth investigation of one particular industry allows us both to come to detailed conclusions about that specific sector as well as giving us the basis for making broader generalisations about UK industry. Inevitably some sectorspecific issues arise but, given its size and scope, the food and drinks sector of the economy is a good representative, having many similarities with other processing and manufacturing sectors. Thirdly, previous work has only investigated a limited number of contingent factors at a time. Our work responds to Chenhall and Langfield-Smith s (1998) call for future studies (which) add to our understanding of the research problem by considering the role of additional relevant variables. (p.259). Finally, it looks at a broad set of management accounting practices (budgeting, performance evaluation, costing, decision-making, communication and strategic analysis). Anderson and Lanen (1999), for example, support the need for this type of research: Clearly greater understanding of both individual practices and macroscopic relationships among practices is needed. However, we found very little of the latter in the extant literature (pp.408-9). In summary, our aim is to address the following two questions: 1. How sophisticated are management accounting systems in the UK food and drinks industry? 2. To what extent are UK management accounting practices influenced by external factors, organisational factors, and processing factors. 3 Examples include Gordon and Narayanan (1984), Govindarajan and Gupta (1985), Chenhall and Morris (1986), Mia and Chenhall (1994), Gul and Chia (1994), Chia (1995), Chong (1996), Chong and Chong (1997), Chenhall (1997), Sim and Killough (1998), Mia and Clarke (1999), Anderson and Lanen (1999), and Chenhall and Langfield-Smith (1998).

13 Management accounting practices Empirical research design An empirical study was conducted to address the research questions stated in the previous chapter. The design of the study is explained in this chapter which is divided into the following sections: Data collection method. Sample frame and size. The questionnaire design. Responses to questionnaire. Evaluation of non-response bias. Measurement of contingent variables. 3.1 Data collection method A postal questionnaire was used to collect empirical data. This facilitated access to a large number of respondents and thus provided sufficient data for statistical analysis, without undue cost. Such a large number would be difficult to achieve through face-to-face interviews because of the constraints of time and cost. In addition, the time and other pressures on management accountants and production managers would have severely restricted the number willing to be interviewed. Nevertheless, a limited number of face-to-face interviews were carried out. First, to pilot the questionnaire before sending it out, and secondly, to follow-up the questionnaire in order to check the reliability of the survey results and to seek further explanation of some of the responses. Five face-to-face pilot interviews (three management accountants and two production managers) were undertaken before the questionnaire was sent out in July These interviews were divided into three parts; in the first part interviewees were asked to give a brief description of their companies and their main responsibilities. They were then presented with the draft questionnaire and asked to answer the questions and comment on their clarity and relevance. Finally, comments were sought on the general design of the questionnaire and its content and, in particular, whether there were any other questions that they may have expected to see. The interviews took between 45 and 90 minutes and were tape recorded and transcribed. After each interview the questionnaire was modified to reflect the comments received from the interviewees. The questionnaire was also reviewed by seven academics. Another set of interviews was carried out in February and March 2002 to follow up issues arising out of the analysis of responses to the actual questionnaire instrument. The six interviewees were all key personnel responsible for running and managing the management accounting and production systems in their companies. They were selected from those who had responded to the questionnaire and our interviews aimed to check the reliability of the questionnaire responses and to gain more insights into the survey results. 3.2 Sample frame and size One aim of this survey was to study the relationship between management accounting practices and specified manufacturing procedures. It was therefore appropriate to investigate a sample of manufacturing or processing companies. In order to remove irrelevant distractions arising out of variations between industries, we decided to concentrate on the food and drinks sector which is suitably large, broad and therefore reasonably representative. After reviewing a number of available databases, FAME (Financial Analysis Made Easy) was found to be the most appropriate for choosing a sample frame. It provides extensive information about public and private British companies. A number of criteria were used in selecting companies for inclusion in the sample: a 1992 SIC UK industry code of 15 (manufacture of food products and beverages) employment of at least 30 people being active and independent companies having a registered office address in England, Scotland or Wales. A total number of 658 companies satisfied these criteria 1 and constituted the sample frame for this research. The information gathered includes data related to practices of management accounting, data on strategic business units (SBUs ) structure and performance and information related to products processed/manufactured. Difficulty was anticipated in obtaining all this information from any one single company employee. Accordingly, two versions of the questionnaire were sent to each sampled company. The first version was addressed to the person leading the management accounting function (MA) while the second version was to be completed by the production manager (PM). First of all, a letter was sent to the company secretary of the 658 companies in May This was an attempt to increase the response rate by obtaining the names of the most appropriate persons to complete the questionnaire 2.Two letters were returned by the post office stamped addressee has gone away and six companies asked to be removed from our sample leaving 650 potential responses. By the end of June names of 148 persons responsible for heading the management accounting function and of 85 production managers, or equivalent, were received. 1 This search was conducted on 5 April A pre-paid SAE was enclosed with the letter.

14 12 Management accounting practices Empirical research design Both versions of the questionnaire were sent to all 650 companies. The questionnaires were addressed to the names that had been obtained or, in cases where they had not been obtained, for the attention of The Management Accountant and The Production Manager. 3.3 The questionnaire design A covering letter was included as a part of the questionnaire. It explained the purpose of the study, the importance of answering the questions, and assured the confidentiality of the information provided. The respondent was also asked if s/he was willing to participate in follow-up interviews and whether s/he would like to be sent a copy of summarised survey results. By using window envelopes and sticking the address label on the covering letter, it was possible to identify the respondents. This was essential in order to make follow-up telephone calls, and it also allowed us to obtain secondary data from the FAME database. As stated earlier two versions of the questionnaire were administered. The MA s version was divided into three sections. The first section included questions related to the management accounting practices of the SBU. These were grouped under five headings: budgeting, performance evaluation, costing system, strategic analysis and information for decision-making. Under each heading, respondents were asked to rate the extent of usage and importance of a range of techniques in their SBUs. A separate question was included to rate the importance of four modes of communicating management accounting information. The second section contained questions that measured the perceived environmental uncertainty, degree of centralisation, strategic orientation and the respondent s perception of their SBU s performance. The final section asked for demographic information about the respondent. The PM s version was also divided into four sections. The first section included questions related to processing factors: complexity of processing system, total quality management, just-in-time, and product perishability; also questions related to the extent of concentration of customer base. The second and third sections were similar to those in the MAs questionnaire. The final section included questions related to measuring the extent of the PM s satisfaction with the firm s management accounting system. 3.4 Responses to questionnaire As stated earlier the two versions of the questionnaire were sent to 650 companies in the food and drinks industry in the first week of July Three weeks later a second copy of the questionnaire was sent to all non-respondents. By the end of first week of September, we received 194 responses (96 from MAs and 98 from PMs). Of these responses, 25 completed questionnaires were received from both the MA and PM of the same company. In the last week of September, follow-up telephone calls were made to all non-respondents of the companies from which we had received only one completed version. All other non-respondents were sent a third copy of the questionnaire. By the end of October, a total of 280 questionnaires were returned giving a response rate of 21.5% (280/1300). Of these 31 were blank because of company policy not allowing responses to surveys or the company was small/ceased/in the middle of a merger. The net response rate was thus about 20% (249 completed questionnaires / 1250 potential respondents). A further five responses were judged invalid because of a large portion of the questionnaire was not completed. Hence 245 usable completed questionnaires were used in the analysis giving a net usable response rate of 19.6% which was considered acceptable. Of these usable completed questionnaires 122 were MA version and 123 PM version. Forty eight companies completed both versions of the questionnaire. 3.5 Evaluation of non-response bias A potential threat to the conclusions of a postal survey is non-response bias. In order to assess the possibility of the existence of such bias, comparisons between the sample frame and the responding companies using t-tests on company size were conducted. Company size was measured by turnover, fixed assets, and number of employees for the year ended There was no significant difference between the two samples for each size measure. Further, the answers to the main questions in the questionnaire from respondents who further replied without the follow-up telephone calls, were compared with the answers from respondents who replied only after the follow-up telephone calls. Again, there was no significant difference between these two groups of answers. From the above, it can be concluded that the two samples are drawn from the same population and the existence of non-response bias is not likely to be a threat to the conclusions based on the actual sample.

15 Management accounting practices Empirical research design Measurement of contingent variables Our study examined a number of potentially causal (or explanatory) variables through two different questionnaires sent to each company. In this way we ensured that the information we sought was provided by a knowledgeable person in the firm. Four variables were measured in both versions. These variables are perceived environmental uncertainty, competitive strategy, firm s structure (decentralisation) and perceived performance. An average of the two responses was used in the analysis. The measures of customer power, processing system complexity, AMT, TQM, JIT and product perishability were derived from the questionnaires sent to production managers while the measure of size was derived from published sources. Although reporting of values these contingent variables is not an objective of this study, the descriptive statistics are shown in Table 3, as they will be referred to and discussed in Chapter 6. Table 1. Descriptive statistics of the potentially causal (contingent) variables No. of Variables responses Mean Std. dev. Min. Max. Perceived environmental uncertainty Customers power Competitive strategy Firm structure decentralisation Size total assets (in million) Complexity of processing system AMT TQM JIT Product perishability The descriptive statistics in Table 1 above show that the companies surveyed have a range of characteristics including: An average value of total assets of 27.5 million but wide dispersion around that. A moderately high level of perceived environmental uncertainty. Being part of a value chain in which their customers, often supermarkets, typically have considerable power. Tending, on the spectrum of competitive strategy, towards product differentiation rather than cost leadership. This is supported by a high level of product diversity and complexity. A moderately high level of monitoring and control of quality. No strong evidence of decentralisation and delegation or of the application of advanced (automated) manufacturing (processing) technologies. A high level of perishability of product which corresponds with moderately high engagement with JIT. In Chapter 4, which follows, we turn to the measurement and descriptive statistics of the management accounting practices which are the dependent (outcome) variables of this study.

16 14 Management accounting practices 4. Survey findings concerning the use and importance of management accounting practices As explained in Chapter 3, questionnaires were mailed to the management accountant and the production manager of 650 companies. In total, 245 usable completed questionnaires were received and analysed. Of these, 122 were replies to the MA version questionnaire and 123 were of the PM version. In this chapter we report and comment upon summary statistics of the responses to those questions that asked about management accounting practices. These data are of interest in their own right and also provide input to Chapter 5 in which we assess the sophistication of management accounting in the UK food and drinks industry. In the MA version, respondents were asked to indicate the frequency of production or use of 38 management accounting practices (MAPs) using a five point Likert-type scale (1 indicating never and 5 indicating very often). They were also asked to rate the importance of each technique/practice using either not important, moderately important or important. The 38 MAPs were classified into five groups: costing system, budgeting, performance evaluation, information for decision making, and strategic analysis. In addition separate questions were asked concerning the communication of management accounting information. The results of each group are reported in turn as follows. 4.1 Costing systems Traditional absorption costing systems have long been subject to criticism. Two long-standing issues of debate have been the choice of appropriate overhead recovery rates i.e. plant-wide or more specific, and secondly the controversy 1 about the need to recover (or absorb) overheads at all. The public marginal costing versus absorption costing debate ran out of steam with the adoption of SSAP 9 but we explore our expectation that the separation between fixed and variable costs is very much alive in internal reporting practice. During the last two decades the problems of traditional absorption costing were again brought under the spotlight. The main focus of criticism was that these systems do not accurately measure costs for decision making purposes. Activity-based costing (ABC) was introduced as a technique to help organisations overcome this problem. Also, target costing 2 and the costing of quality were introduced as tools for confronting increased competition. Costs of quality are typically classified into four groups: prevention, appraisal, internal failure and external failure. Providing information related to quality costs is important when making decisions between differing quality-related alternatives. To find out the extent to which practitioners applied their costing system to provide more accurate cost information for decision making purposes, respondents were asked to indicate how often are seven techniques related to costing systems. The responses are summarised in panel A of Table 2. The data on frequency of usage needs to be interpreted with caution. Some MAPs are conventionally only carried out infrequently e.g. activity-based budgeting is perhaps an annual exercise. So, for instance, it is possible that some respondents may have answered very often to such a question if, when they do prepare budgets (albeit infrequently) they always use the activity-based approach; others may have answered the question more at face value 3. Such problems of interpretation almost inevitably arise when questionnaires are used on a broad set of themes. This is partly mitigated by our supplementing the question of usage with that of importance. These data are shown on the left-hand side of Table 2. From the right-hand side it can be seen that 48% (29% + 19%) of the companies either often or very often distinguish between variable/incremental costs and fixed/non-incremental costs for decision making purposes. The importance of this separation was acknowledged by 83% of respondents rating it as either moderately important or important. By contrast a relatively small number indicated high usage of the three techniques (plant-wide, multiple-rate or ABC) for allocation of overhead to cost objects. Even though it can be argued that plant-wide, departmental and activity-based techniques are mutually exclusive, nevertheless the figures indicate that overhead allocation does not appear to be done very frequently. The combination of these two findings suggests that variable (or direct) costing is much more common than various forms of absorption costing. While absorption (including ABC) costing has a relatively low usage rating, it nevertheless seems to have considerable importance; 44%, 51% and 46% of respondents rated the three forms either moderately important or important. Respondents are aware of the importance of overhead allocation techniques but many believe that it is not worth implementing them frequently. This may indicate that they are seen to be important in non-routine costing studies carried out from time to time. Likewise the costing of quality is seen to be extremely important but not very frequently calculated. Finally, advanced modelling of cost relationships and behaviour is neither seen to be important nor often used. 1 See Dugdale and Jones (2002) Battles in the Costing War: UK Debates, We thank one of the anonymous reviewers for drawing this to our attention. 2 To set a target cost, companies need first to determine a target price based on competition and marketing factors. The target price should be set at a level that permits the company to achieve a desired market share and sales volume (Drury et al., 1993). Then a desired profit margin is deducted from the target price to determine the target cost, which becomes the goal to achieve by generating alternative acceptable product designs.