The effects of Cost Accounting on the performance of SMEs in Buea Municipality

CHAPTER ONE

INTRODUCTION

1.1   Background of the study

The business environment in Cameroon has become intensively dynamic and increasingly unpredictable in recent decades and, correspondingly, managing companies has become more demanding. The SMEs sector has been recognized worldwide for its role in economic advancement through various ways like; wealth generation, employment creation, and poverty reduction (Kithae, Gakure, & Munyao) (2012). In the current global economy, small and medium sized enterprises (SMEs) are progressively being regarded as powerful engines for economic empowerment and development for most economies in the world (Islam, Khan, Obaidullah & Alam, 2011). Muraguri (2010) argues that small and medium enterprises have been known to contribute greatly in economic growth of both developed and developing countries.

Amoako (2013) points out that accounting information users in SMEs is on the increase and the quality of accounting information utilized within the SMEs has a positive relationship with an entity’s performance as well as survival. For a business to successfully manage its finances, an effective cost accounting system is of vital requirement. Therefore a poor accounting system or the absence of a cost accounting system maybe the reason for a company’s lack of success and profits.

Cost accounting therefore is the process 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 also referred to as managerial or management accounting, is used by managers to collect data in an effort to improve performance. This process is aimed at capturing a company’s costs of production by assessing the input costs of each step of production as well as the fixed costs of depreciation of capital equipment such as buildings, machineries etc by Miriam Nicole Huffman(2018). Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

All businesses, whether service, manufacturing or trading require cost accounting to track their activities. The limitations of financial accounting have made the management to realize the importance of cost accounting. Whatever may be the type of business, it involves expenditure on labour, materials and other items required for manufacturing and disposing of the product. The management has to avoid the possibility of waste at each stage. It has to ensure that no machine remains idle, efficient labour gets due incentive, byproducts are properly utilized and costs are properly ascertained. Besides the management, the creditors and employees are also benefited in numerous ways by installation of a good costing system. Cost accounting increases the overall productivity of an organization and serves as an important tool, in bringing prosperity to the nation. Thus, the general role of cost accounting can be seen in the following aspects;

• Cost accounting helps in periods of trade depression and trade competition – In periods of trade depression, the organization cannot afford to have losses which pass unchecked. The management must know the areas where economies may be sought, waste eliminated and efficiency increased. The organization has to wage a war not only for its survival but also continued growth. The management should know the actual cost of their products before embarking on any scheme of price reduction. Adequate system of costing facilitates this.

• Cost accounting aids price fixation – Although the law of demand and supply to a great extent determines the price of the article, cost to the producer does play an important role. The producer can take necessary guidance from his costing records in case he is in a position to fix or change the price charged.

• Cost accounting helps in making estimates – Adequate costing records provide a reliable basis for making estimates and quoting tenders.

• Cost accounting helps in channelizing production on right lines – Proper costing information makes it possible for the management to distinguish between profitable and non-profitable activities. Profits can be maximized by concentrating on profitable operations and eliminating non-profitable ones.

• Cost accounting eliminates wastages – As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

• Cost accounting makes comparisons possible – Proper maintenance of costing records provides various costing data for comparisons which in turn helps the management in formulation of future lines of action.

• Cost accounting provides data for periodical profit and loss account – Adequate costing records provide the management with such data as may be necessary for preparation of profit and loss account and balance sheet at such intervals as may be desired by the management.

• Cost accounting helps in determining and enhancing efficiency – Losses due to wastage of materials, idle time of workers, poor supervision, etc., will be disclosed if the various operations involved in the production are studied carefully. Efficiency can be measured, costs controlled and various steps can be taken to increase the efficiency.

• Cost accounting helps in inventory control – Cost accounting furnishes control which management requires in respect of stock of materials, work-in-progress and finished goods.

• Investors, banks and other money lending institutions have a stake in the success of the business concern and are, therefore, benefited immensely by the installation of an efficient system of costing. They can base their judgment about the profitability and future prospects of the enterprise on the costing records.

• Employees have a vital interest in their employer’s enterprise in which they are employed. They are benefited by a number of ways by the installation of an efficient system of costing. They are benefited, through continuous employment and higher remuneration by way of incentives, bonus plans, etc.

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. Given the importance of SMEs in an economy; it becomes quite plausible to look at factors affecting or hindering their performance which is a major determinant of their survival and growth. For SMEs business to experience growth, cost accounting system must be put in place and use appropriately. All businesses in general are more focus with the final result (profit or loss) rather than focusing on elements of cost which if well monitored and controlled will increase the profitability of the business. The uniqueness of small and medium scale businesses call for careful consideration in the design of accounting systems. 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 and the Justification of Study

The private sector which in the past in Cameroon was not so important is now being recognized as an engine to economic growth in the country. In most developing countries the private sector is mainly represented by small and medium sized enterprises (SMEs) and this is also the case in Cameroon. Thus, in Cameroon SMEs plays a critical role in stimulating and alleviating poverty. It is widely acknowledged that SMEs are an effective instrument for employment creation, income generation and economic growth, even in developed countries such as United States and in Europe; SMEs significantly and highly contribute to the GDP.

Despite the effort of the government in order to improve the SMEs in Cameroon, the country still has a rigid business environment that hinders the development of local small enterprises and entry opportunity for foreign investors. According to Maduekwe (2015) SMEs are perceived to be failing partly due to a lack of an ineffective use of management accounting practices such as budgets, performance management tools (PMTs) and pricing tools. Ahmad (2012) argued that one of the reasons for business failure is poor management ability which includes accounting problem-solving. Further, Hopper (1999) using data based on the results from Japanese companies concluded that a failure to adopt management accounting practices (i.e. cost 19 management systems) in a similar way to their larger counterparts and, at the margins, to experiment with new forms of control that are more profit oriented may be a factor in the currently high failure rate of SMEs. Based on these argument it can be suggested that cost accounting practices are important for SMEs if they are to avoid failing.

The growth of large businesses with skillful professional accountants that can manage and coordinate the resources of the entity causes the researcher to know how cost accounting can be of great importance in the growth of small and medium sized enterprises. In Cameroon, SMEs cover the entire range of economic activity within all sectors and share a number of common problems that hinder them from effective performance as a result of 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.

Another problems facing SMEs is Lack of competent management which is

the 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 produced. only has adverse effect 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 present study has as the main research question what is the effect of cost accounting on the performance of SMEs in the Buea area. Other specific questions include;

• What cost accounting systems are used by SMEs in Buea?

• To what extent does cost accounting affect the performance of small and medium-size enterprises in Buea?

• Does the performance of small and medium-size enterprise, depends on the cost accounting system implemented?

• What are the challenges faced by SMEs in Buea to properly apply cost accounting?

1.3 Objectives of  Study

The main objective of the study is to assess the effects of cost accounting on the performance of small and medium sized enterprises in Buea. In order to achieve this, the following specific objectives are relevant;

• To assess the various cost accounting systems used by SMEs in Buea.
• To assess the extent to which cost accounting affect the performance of SMEs in Buea.
• To assess whether the performance of SMEs in Buea depends on the cost accounting system implemented.
• To identify the challenges faced by SMEs in the use of cost accounting system in Buea.
• To make recommendations on how SMEs can improve on their cost accounting application.

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