The Use of Management Accounting Techniques by Canadian Small and Medium Sized Enterprises: A Field Study
Howard M. Armitage, Ph.D, FCMA Alan Webb, Ph.D, FCPA, FCA
University of Waterloo January 2013
The Use of Management Accounting Techniques by Canadian Small and Medium Sized Enterprises: A Field Study
ABSTRACT
Small and medium size enterprises (SME’s) represent a large and important part of the Canadian economy. However, little is known about the extent to which Canadian SME’s utilize contemporary management accounting techniques such as costing
systems, budgets, responsibility centre reporting, and analysis for decision-making. We conducted in-depth field interviews at 11 Canadian SME’s to: (1) determine the extent to which widely accepted management accounting techniques and tools are being adopted at SME’s of various sizes and industries and (2) explore the underlying reasons why specific techniques are not being used. We find that of the 19 well-known management accounting techniques addressed in our interviews, only a small proportion are
moderately or highly used by the participating companies. Moreover, we find that manufacturing companies in our study are considerably more likely to use certain techniques such as costing systems and responsibility centre reporting. We discuss the implications of our findings for management accounting educators, textbook authors, and developers of professional education programs.
The Use of Management Accounting Techniques by Canadian Small and Medium Sized Enterprises: A Field Study
INTRODUCTION
This study examines the use of, and demand for, management accounting information in Canadian small and medium enterprises (SME’s).1 Industry Canada’s July 2012 Key Small Business Statistics reports that of Canada’s 1.12 million “employer business” establishments, 98% are considered small (<100 employees). An additional 1.7% or 19,000 companies are medium sized (100-499 employees). Together, they account for 54% of Canada’s gross domestic product (GDP) and employ about 6.9 million (64 percent) of private sector employees in Canada. An alternative way of looking at this is to note that less than one half of 1% of Canada’s business establishments fall into the non-SME or ”large” firm category. This is true of other developed economies and even more pronounced for underdeveloped and middle-income countries.
Despite the prominent role of SME’s in the Canadian economy, even a cursory glance at today’s management accounting textbooks reveal techniques (e.g., activity-based costing, flexible budgeting) and analytical approaches (e.g., discounted cash flow analysis) that appear to be more applicable to large organizations than to SME’s (e.g., Garrison et al. 2011). Similarly, academic journals dedicated to the dissemination of management accounting research focus more on issues of concern to larger
organizations than to the specific ways in which management accounting principles and
1
Industry Canada (2012) defines "SME" (small and medium-‐sized enterprise) as all businesses with fewer than 500 employees. Within the SME designation, a microbusiness is an enterprise with fewer than five employees, a small business is one with fewer than 100 employees (if the business is a goods-‐producing business) or fewer than 50 employees (if the business is a service-‐based business) and a medium business as one between 100-‐499 employees. Firms with 500 or more employees are classified as large businesses. Of the 1,122,306 employer businesses registered in Canada, 2,528 (about 0.2 percent) have 500 employees or more, 18,999 have between 100-‐499 employees and 1,100,779 employer businesses (98 percent) have fewer than 100 employees. http://www.ic.gc.ca/eic/site/061.nsf/eng/02715.html
procedures can add value to lean, fast growing but smaller organizations (e.g., Abdel-Kader and Luther 2006; Clinton and White 2012). Moreover, while there is a
considerable popular literature on accounting for SME’s, most of this is related to dealing with financial accounting and reporting impediments, tailored software
applications and toolkits discussing bookkeeping, cash flow forecasts and budgets. At issue is the extent to which SME’s have separate requirements that are not being
captured either by the content of current management accounting educational materials, or the advice provided by accounting professionals or approaches taken by professional management accounting bodies.
The extent to which SME’s make use of commonly taught management accounting techniques and tools is an important question in Canada. First, as noted above, SME’s represent a significant portion of total Canadian economic activity with respect to GDP and employment. Second, management accounting practice was largely developed in a manufacturing era but Canada and many other industrialized countries have witnessed a steady decline in manufacturing. For example, Statistics Canada (2012) notes that manufacturing declined as a percentage of total GDP from 24.3% in the 1960s, to 15.6% in 2005, and in 2010, following the recession, accounted for only 13%. Much of manufacturing’s decline has been offset by the growth in service producing industries that may not benefit from traditional management accounting techniques and tools designed for application in a production environment.
Third, while writers such as Nandan (2010) argue that SME’s require
sophisticated management accounting techniques comparable to what is used by larger organizations, this view is being challenged. Blank (2012) argues that the assumption
that small business is simply a “small” version of a bigger business and requires the same management accounting tools as those utilized in large firms, is misguided. He points out that the primary focus of small companies is to “search” while the primary focus of larger companies is to “execute”. For example, until recently, the advice to small organizations has been to adopt similar approaches to those of larger
organizations (Blank 2012). That is, develop an operating plan, construct a financial model, create a business plan and execute strategy, hire the employees, implement the marketing plan, and establish planning and control procedures. While this approach may be appropriate for well-established companies, analyses of small businesses shows that even well thought out business plans seldom survive first contact with customers. Blank (2012) contends that SME unpredictability is so high that prematurely devoting resources to “execution” type techniques and tools may actually contribute to high failure rates by distracting small businesses from their core mission of “searching for” and “refining” what customers need (or want) and are willing to pay for.2 This view argues that the organization structures and information needs of SME’s are very distinct and because they are constantly in survival mode, there is less need to focus on
management accounting techniques and tools. Instead, the imperative for SME’s is to concentrate their limited resources on refining their value proposition, establishing the customer/product/channel fit, and adopting a limited number of key performance metrics consistent with the dynamics of their specific revenue and cost stream(s).
Consequently, this research is motivated by our observations that for an
economic segment as large and as important as the SME sector, there is a general lack
2 Industry Canada reports a 50% corporate failure rate with the first five years of operation http://www.ic.gc.ca/eic/site/061.nsf/eng/rd02473.html#point4.2
of knowledge in Canada regarding the utilization of contemporary management
accounting procedures and techniques. Our two primary research objectives are to: (1) determine the extent to which management accounting techniques and tools taught to Canadian business students are being used by SME’s of various sizes and industries and (2) explore the underlying reasons why specific techniques are not used.
To address our research objectives we conducted 11 in-depth field interviews at SME’s in southwestern Ontario. The focus of the interviews was on the extent to which 19 management accounting techniques commonly taught to business students (college or university) were being used by the company. For those techniques not used we sought management’s rationale for non-adoption. We also asked management to describe additional information or analyses used for planning and control purposes.
Results show that the most commonly used management accounting techniques include operating budgets, costing systems, segment reporting, variance analysis, financial statement analysis, variance analysis (actual versus budget) and performance measurement systems incorporating non-financial metrics. The least used techniques include advanced costing approaches such as quality costing and activity-based costing, flexible budgeting, and discounted cash flow analysis. While we find some differences in the use of management accounting techniques when comparing small to medium companies in our sample, the differences are more pronounced when we compare manufacturing to non-manufacturing companies. In particular, manufacturing companies indicated considerably greater use of techniques such as standard costs and variable costing, as well as making greater use of responsibility centre reporting, cost allocations and cost behavior analysis.
Although based on a relatively small sample, our results are suggestive of a considerable disconnect between the management accounting techniques taught to business students and what companies are actually using. In particular we find that the non-manufacturing SME’s in our sample indicated either or no or low usage for nearly two-thirds of the 19 techniques examined by our study. As the first study to document the use of management accounting techniques by Canadian SME’s we believe our study lays the groundwork for a dialogue centred on the appropriateness of accounting curriculums currently being used by our post-secondary institutions. Similarly, our results are relevant to designers of professional education programs and suggest the need for training that emphasizes techniques utilized most by management in SME’s such as financial statement analysis and performance measurement systems
incorporating non-financial metrics. Further, our findings should also be of interest to textbook authors who largely control the content of what appears in contemporary management accounting texts. Given the potential implications of our results, we also believe further research is needed both in Canada and abroad to assess the extent to which they generalize beyond the sample used in our study.
The rest of the paper is organized as follows. The next section provides a brief overview of research that has examined the use of management accounting techniques in larger companies as well as SME’s, following which we state our research questions. We then describe our research method, present our results, and finally we conclude with a discussion of our study’s implications.
LITERATURE REVIEW AND RESEARCH OBJECTIVES
There has been considerable research interest over the past 30 years in
developing a better understanding of the management accounting (MA) techniques and tools actually employed by organizations (Nandan 2010; Perren and Grant 2000). Research in this area ranges from broad-based surveys examining the use of MA techniques in companies of varying size (e.g., Abdel-Kader and Luther 2006) to studies focused on the extent to which specific MA techniques such as performance
measurement systems are used in SME’s (Sousa, Aspinwall and Rodrigues 2006). While it is beyond the scope of this paper to provide an exhaustive review of this body of research, this section provides a brief overview of studies that have examined the use of a broad-set of MA techniques in both large companies and SME’s. Next, we provide an overview of research that has specifically focused on the use of MA
techniques in SME’s. Finally we outline the research opportunities we have identified as the result of our literature review.
Broad-Based Surveys of MA Techniques
Research in this area typically examines the extent to which organizations of varying sizes employ MA techniques and tools commonly taught in introductory and advanced undergraduate courses in management accounting (e.g., Abdel-Kader and Luther 2008). Use of the survey-method is common in this area of research. Our literature review indicates this area has received the most research attention spanning several decades. A stated objective in many of these studies is to describe the extent to which management accounting in practice corresponds to what post-secondary
Ahmad and Alwi 2004). The MA techniques examined include concepts such as costing systems (e.g., activity-based costing, target costing, and quality costing) or budgeting approaches (e.g., flexible budgeting, zero-based budgeting) as well as analytical methods such as cost-volume-profit analysis or discounted cash flow analysis. Our review of the literature indicates considerable overlap in the lists of MA techniques covered by studies in this area.
Some studies focus on the use of MA techniques by companies in a specific industry (e.g., Abdel-Kader and Luther 2006) while others examine the use of MA techniques by companies across industries in a specific geographic area (Alleyne and Weekes-Marshall 2011; Clinton and White 2012; Sulaiman et al. 2004; Wu, Boateng and Drury 2007). While it is difficult to draw conclusions about the use of specific MA techniques given the range of geographic areas and industries covered, and the variation in company size and complexity within and across the studies, a few patterns do emerge. For example, the use of budgets for planning and control purposes, and customer profitability analysis seem common while the use of other techniques such as activity-based costing, quality costing, target costing and discounted cash flow analysis is limited (Abdel-Kader and Luther 2006, 2008; Clinton and White 2-12; Alleyne and Weekes-Marshall 2011; Sulaiman et al. 2004).3
Other studies in this area have attempted to identify factors that influence the adoption of MA techniques. For example, Sulaiman et al. (2004) provide an extensive review of research that has examined the use of MA techniques in China, India,
Malaysia and Singapore. The authors argue that research of this type can provide
3Perhaps because of the difficulty in comparing results across studies of this nature, we could find no meta-analytic approaches to summarizing key findings from this literature.
important insights regarding the effects of cultural differences on the adoption and use of MA techniques.4 Wu et al. (2007) provide a comparison of the use of MA techniques by state-owned enterprises (SOEs) and joint ventures in China. They find that overall, Chinese joint ventures with foreign entities are more likely to adopt certain MA
techniques such as responsibility accounting than SOEs (Wu et al. 2007). Finally, some studies have adopted a contingency framework approach in examining firm-level
characteristics or operating environment factors that influence the sophistication of the MA techniques used by organizations. For example, Abdel-Kader and Luther (2008) find that the sophistication of MA techniques used by companies in the food and drink
industry in Britain is significantly influenced by the level of environmental uncertainty, customer power, decentralization and firm size.
Use of MA Techniques by SME’s
Our literature review reveals that considerably less research attention has been given to the use of MA techniques and tools by SME’s. Moreover, most of the studies we reviewed in this area examine the use of specific MA techniques by SME’s and tend to be focused on ‘current’ trends in management accounting at the time. For example, Hudson, Smart and Bourne (2001) use a series of 8 field interviews to document the way in which performance measurement systems (e.g., the balanced scorecard) are developed and used by SME’s.5 They find a considerable disconnect between what students learn about performance measurement during post-secondary education and what SME’s do in practice. In particular, the SME’s studied by Hudson et al. (2001) tend
4Although the authors assert the importance of such cross-cultural analysis, their study offers few conclusions regarding the impact of culture on the use of MA techniques.
5Hudson et al. (2001) motivate their study in part, based on the considerable interest in both academe and practice on innovative performance measurement approaches such as the balanced scorecard that began to gather momentum in the early 1990s (e.g., Kaplan and Norton 1992; Kaplan and Norton 1996).
to have measurement systems that are not closely linked to firm strategy, focus heavily on financial metrics, and are developed on an ad-hoc basis by individual managers. Sousa, Aspinwall and Rodrigues (2006) examine the use of performance measurement systems in British SME’s. Based on survey evidence, they find that SME’s tend to use a limited set of financial metrics but the smaller companies in their sample did report making greater use of forward-looking measures related to innovation processes as well as using customer-related metrics. In a more recent example, Timans et al. (2012) study the use of the lean six-sigma approach (LSS) by SME’s for implementing continuous improvement processes. Based on a combination of survey-data and in-depth field interviews, Timans et al. (2012) find that about 40% of the SME’s in their sample use some form of LSS but also report that the lack of resources represents a key impediment to adoption of the technique.
Our literature review yielded very few examples of studies that have looked at the use of a broader set of MA techniques by SME’s. Davila and Foster (2005) examine the adoption of management accounting systems by startup companies in the U.S. Their sample consisted of 78 non-public companies that were less than 10 years old, and had between 50 and 150 employees.6 They find that use of cash budgets and operating budgets is common but adoption of these tools is more likely by the larger companies in their sample and by the companies receiving venture capital. They also find greater use of budgets by startup companies who have a financial manager on staff. In a more recent study Ilias et al. (2010) uses the survey method to examine the adoption of MA practices by Malaysian firms across multiple industries. Some of their results are
6The industry breakdown of their sample is as follows: 12 biotechnology companies, 48 information technology companies, and 18 other.
consistent with findings reported above for larger companies in that the majority (67%) of the 58 companies in their sample use budgets for planning and control purposes while relatively few use more specialized techniques such as target costing (32%) or economic value added metrics (12%). However, contrary to the results for larger companies discussed above, they find that 50% of the survey respondents use some form of activity-based costing.
Finally, there has been some research comparing the use of MA techniques by SME’s to that of large companies. Brierley (2011) compares product-costing practices of SME’s and large companies in Britain. Not surprisingly he finds that larger companies are more likely to use more sophisticated costing approaches such as employing multiple departmental rates for assigning overhead to cost objects or using activity-based costing. Using a similar approach, Clinton and Free (2012) survey IMA members in the U.S. and among other things, compare small and large companies with respect to the most important MA techniques likely to be employed in the near future and how this has changed over time (i.e., since 2003). They find both small and large companies report that business intelligence systems designed to extract information from existing databases represents the most important area of future development for MA
techniques.
Research Objectives
Despite the prominence of SME’s in the business sector in Canada and elsewhere, our literature review shows a surprising lack of research examining the breadth of MA techniques used by these organizations. Our observations are consistent with those of Nandan (2010) who notes research focused on the use of management
accounting by SME’s is “considerably lacking” (p. 64). To the extent researchers have focused on SME’s, with few exceptions (e.g., Davila and Foster 2005) the studies have tended to concentrate on the extent to which ‘hot’ MA techniques (e.g., performance measurement systems) are being used (e.g., Hudson et al. (2001) or have narrowly compared the use of a specific technique such as product costing across large and small companies (e.g., Brierley 2011). Moreover, we could find no research published in the past 20 years that has examined the use of MA techniques by Canadian SME’s.
We believe the dearth of research focused on the use of MA techniques by SME’s represents a considerable opportunity that is important to address. Given that about 64% of private sector employees in Canada work at SME’s, research is needed that examines the congruence between MA topics taught to business students at Canadian post-secondary institutions, and the MA techniques actually used by a large segment of organizations.7 Further, we concur with those who suggest that given the resource constraints, competitive pressures and opportunities for rapid growth faced by many SME’s, understanding the types of MA techniques used by these organizations is important for educators and practitioners alike (Blank 2012; Mitchell and Reid 2000; Nanda 2010). Indeed, we believe SME’s represent a fascinating setting in which to examine the types of MA techniques being used to facilitate and influence decision-making in a highly dynamic environment (Mitchell and Reid 2000).
Given the general lack of research on the use of MA techniques by SME’s and the particular shortfall of studies examining the breadth of those techniques used by Canadian SME’s, we pose the following research questions:
7We admittedly use the term “business student” loosely and intend it to encompass all students receiving some business (e.g., accounting) instruction as part of their college or university program (certificate or degree) even if their area of concentration is in another discipline (e.g., science).
RQ1: To what extent are the common MA techniques taught to business students at Canadian post-secondary institutions being used by Canadian SME’s?
RQ2: For common MA techniques taught to business students at Canadian post-secondary institutions but not commonly used by Canadian SME’s, what are the reasons for the lack of use?
RESEARCH METHOD Data Collection
We used in-depth field interviews instead of a survey-based approach to data collection for two related reasons. First, field interviews offer the potential to gather richer descriptive evidence because they provide an opportunity to ask follow-up and probing questions. For example, if a particular MA technique is not used by a given SME, consistent with prior research (Nandan 2010) we think it important to develop an understanding as to why this is the case. The interview method clearly lends itself to this type of follow-up much more readily than surveys. Accordingly, given the general lack of research on the use of MA techniques (or lack of use) by Canadian SME’s, we felt it more important to gather rich evidence from fewer companies rather than using a widespread survey approach at this time. Second, in keeping with Perren and Grant (2000) we believe that not all management accounting techniques or information can be neatly classified using the pre-defined slate of topics found in typical introductory and advanced textbooks. That is, some management accounting information may be
location-specific, developed to facilitate the idiosyncratic decision-making needs of SME owners or managers. As such, the interview method allows us more scope to explore MA techniques used by SME’s that fall outside our pre-conceived notions of what we expect to find.
We used contacts in the local business community to identify potential
participants for the study.8 We attempted to find companies that ranged in size but still met Industry Canada’s criterion of small (<100 employees) and medium (<500
employees) enterprises. We chose not to seek participation from microbusinesses, i.e., those with fewer than five employees, as we expected organizations of that size would be considerably less likely to employ anything other than very basic management accounting techniques.
Table 1 summarizes the characteristics of the 11 companies that participated in our study including industry, number of employees, and the title and experience of the individual(s) who participated in the interview. As shown in Table 1, we were successful in gaining access to SME’s that ranged in size from 13 employees to 500 at the time the interview was conducted9. Given the focus of our study, it was important that our
interviewees possessed a detailed knowledge of the accounting information being used by the organization and the type of analysis used to facilitate decision-making.
Accordingly, all interviews were conducted with senior accounting and finance managers (e.g., CFO, Director of Finance, and V.P. Finance) or the CEO. In one
company, the CEO, CFO and Controller all participated in the interview. We also gained participation from organizations in a variety of industries as shown in Table 1. For
purposes of preserving anonymity, we have classified the participants as: (1) “hi tech” companies, (e.g., software developers, gamification system developers); (2)
8 We conducted our interviews in the Region of Waterloo. While known as a hi-tech cluster, the region’s industries are well diversified. For the industries chosen for the research – hi tech, manufacturing and automation, there were numerous firms in both the small and medium categories.
9 One firm in our sample experienced rapid growth. At the time we interviewed the CFO, it was a “medium” sized organization but by the end of the year, it had grown to “large” status.
manufacturing companies10; and (c) automation companies that create automated systems for other organizations.
Insert Table 1 about here
Overall we are satisfied that we have a reasonable sample of SME participants and that our interviewees possessed the expertise required to meaningfully respond to our questions. Moreover, there is sufficient variation in the characteristics of our
participating organizations to facilitate observation of any trends that may exist in the use of MA techniques by SME’s of varying size.11
Interview Content and Process
To identify the MA techniques and tools potentially being used by our SME respondents, we first conducted a review of the leading management accounting textbooks used in Canadian universities and colleges to identify the main topics being taught to business students.12 As a reasonableness check, we compared the list of MA techniques and tools identified in our textbook review to those used by recent studies with research objectives similar to ours that reported the specific techniques included in their surveys (e.g., Abdel-Kader and Luther 2008; Alleyne and Weekes-Marshall 2011). We found considerable overlap between our initial list of topics and the lists used in these two studies. The MA techniques covered by our interviews are summarized in
10Although none of our participants were pure manufacturing companies, a number had significant components of manufacturing activity.
11Consistent with prior research we anticipated that larger and more established SME’s might make greater use of MA techniques than smaller and younger SME’s (Abdel-Kader and Luther 2008). The range in size and age of our sample companies provides us with the opportunity to examine whether such variation impacts the use of MA techniques.
12We reviewed Anthony and Govindarajan (2007), Braun et al. (2012) Atkinson, et al. (2012), Garrison et al. (2011), Horngren et al. (2012) and Mowen et al. (2012). Given the high convergence of topics covered by these five textbooks, we deemed it unnecessary to conduct further reviews.
Table 2; the studies conducted by Abdel-Kader and Luther (2008) and Alleyne and Weekes-Marshall (2011) used all of these items.
Insert Table 2 about here
It is worth noting that our list of MA techniques is somewhat shorter than the lists used in the survey-based studies reviewed. For example, the lists used by Abdel-Kader and Luther (2008) and Alleyne and Weekes-Marshall (2011) included techniques such
as Industry Analysis, Value Chain Analysis and Zero-based budgeting. We omitted
techniques such as these where there was divergence in textbook coverage (e.g., some texts did not cover zero-based budgeting) primarily to ensure there was sufficient time to discuss the ‘core’ set of MA techniques covered in all of the textbooks reviewed and thus more likely to be known to our interviewees. 13 Moreover, we gave all interviewees an opportunity to identify additional MA techniques being used that were not included in our list of questions. We believe it is reasonable to assume that our respondents would have identified any important MA technique not covered by our interview questions.
The interviews were semi-structured with details as follows regarding the approach and ordering of the questions:
• For each MA technique included in Table 2, the interviewee was asked if the company used it (yes or no) and if not, to explain why not.14
• After completing our list of 19 MA techniques, the interviewee was asked to identify and briefly describe any additional techniques being used for planning, control or decision-making purposes that we had not covered.
13 Davila and Foster (2005) examine use of management accounting systems more generally (e.g., budgets, product profitability, customer profitability) rather than the specific techniques that may be part of the overall system (e.g., target costing, quality costing, etc.). As such, their list of MA topics examined is narrower than ours.
14Where necessary we elaborated on certain MA techniques to ensure the interviewees had a common understanding of the nature of the items being discussed. For example, both target costing and flexible budgets were techniques for which many interviewees needed further explanation as to their meaning.
• Finally, the interviewee was asked to identify and describe any MA techniques the company was planning to adopt or develop in the near future.
All interviews were conducted on the premises of the participating organization and were completed over a three-month period during spring/summer of 2012.
Interviews ranged in length from 45 minutes to 90 minutes with an average of about 60 minutes. Both authors were present at all interviews and took notes and with two
exceptions all interviews were digitally recorded.15 An offices services professional with no knowledge of our study’s objectives transcribed all recordings. All results reported in the next section are based on a review and coding of the detailed transcriptions. Given the descriptive focus of our study all transcriptions were coded either by one of the authors or a research assistant who holds a graduate degree in accounting.16
The average work experience of the executives we interviewed was 5.4 years (range18 months to 27 years) in their current position. Their total work experience since graduation from university (all were university graduates) was 16.5 years (range 4-27 years). Consequently, we are confident that the respondents were excellent
spokespersons to provide accurate information on the questions we were asking. Ten of the 11 firms were willing to disclose their annual revenue, which ranged from $1M to $90M.
15The recording device malfunctioned during the first two interviews, both of which were conducted the same afternoon. Results for these interviews are based on detailed notes taken by the two authors. 16 Because the coding of transcripts required no interpretation of responses but rather primarily involved documenting answers to specific questions (e.g., are operating budgets used, yes or no?) we did not feel it necessary to have multiple independent coders for each transcript. Both authors reviewed the coding performed by the RA for accuracy and any differences were reconciled.
RESULTS Use of Management Accounting Techniques
In this section we present the results of our first research question:
RQ1: To what extent are the common MA techniques taught to business
students at Canadian post-secondary institutions being used by Canadian SME’s?
Table 3 highlights the responses from the 11 firms regarding the use (and usage intensity) of the 19 management accounting techniques. We summarize the findings using the four categories of management accounting techniques and tools we explored. For each item we report the number and percentage of companies that are using it and the intensity (low, moderate or high) of usage. Intensity of usage details were gathered during the interviews through use of probing questions that asked participants to
discuss how, and to what extent specific tools were being used. Low usage generally meant that the technique was in its infancy or only infrequently used. Moderate usage meant that the technique was being utilized but not to its full potential. High usage meant that firms were utilizing the techniques in a similar manner to what would be described in leading textbooks. Since the boundaries of these descriptive labels were not always exact, we also created two additional columns designed to highlight the results in a more aggregated manner. In many circumstances, there seemed to be only a slight degree of difference between firms indicating a “no use” vs. “low use” of a technique. Consequently, Table 3 provides a combined “No + Lo” column. Similarly, the distinction between “moderate and high” usage was often borderline so we created a
similar aggregated column. It was clear from the interviews is that there was a clear difference between the “No + Lo” and the “Moderate + High” responses.17
Insert Table 3 about here
While acknowledging the small sample size, there are several observations of interest from the data in Table 3. Noteworthy are the following:
Costing Systems
There was strong support for the use of generalized costing systems. This was almost always a version of a job cost system with the “job” being either the client or a project. Small firms employed simple approaches such as using excel spreadsheets, or outsourced their data to a third party. Medium sized firms had more robust costing systems. Typical medium sized company responses included:
A "Job" cost card is created for each project (many of these are large million dollar projects). The cost system tracks the project costs on a daily basis. Each project receives material, labour and an applied overhead. Project costs are rolled up to the company level then to the corporate level. Costs tracked are all "actuals"
and
A job cost system is created for each client - "we’re a project-based environment, and for our environment we have a bill of materials that is a combination of labour and materials and other expenses, and we will track to that budget".
Other key results regarding costing systems are as follows:
• Almost all of the more specific costing techniques - standard costing, target costing
quality costing, and activity-based costing were utilized by less than 50% of the
participants. The exception was variable costing. However, the “low” degree of use variable costing indicated that it was also viewed as only marginally useful.
17Coding intensity of usage did require judgment so one of the co-authors completed this aspect of analyzing all of the transcripts and interview notes rather than having the research assistant complete this step.
• Target costing, quality costing and activity-based costing were the least frequently mentioned.
• Combining the “No + Lo” categories indicates that none of the specific costing techniques achieved a 50% utilization level.
Budgeting Systems
Operating budgets, which include master budgets, quarterly and rolling budgets
are important organizational tools according to our respondents. Ten of the eleven companies employed them, often at highly sophisticated levels. The smaller the company, the more likely they were to focus on the cash component of the operating budget. A CEO of a small tech company was adamant about the importance of cash budgeting.
"Cash is always king, let me tell you. I go literally 12 months, week by week. I open the week with cash in the bank. What money do I expect to collect and deposit this week? What cheques am I writing this week, and I flow that out for a year - 52 weeks - and then every week as actuals happen I change whatever I need to change, and it always rolls out 52 weeks, so at any given point in time I have a pretty good visibility into when cash runs out - or not".
As the size of the organization increases, so does the sophistication of its operating
budget. Following are comments from two respondents, the second from an
interviewee at a company larger than that of the first.
“Budgets are prepared on a quarterly basis and are kept track of on a monthly basis. A month's budget is the corresponding quarter's budget divided by 3.” and
“Yearly operating budgets are prepared and then broken into 12 separate months. Actual costs are compared to budgeted costs. Monthly budgetary and actual costs are tracked by project as well as by total company expenditures. Individual pools of cost are also carefully tracked.”
We also found that flexible budgets, taking in the consequence of volume changes, are rarely used (18%). Capital budgets are reported as being used by less than half of the firms and even where they are employed the intensity of usage is usually low. While a few capital budgets involve acquisitions (other firms or new technologies), most relate to amounts required for maintenance and upgrading activities.
Responsibility Centre Reporting
All of the techniques under this category appear to be utilized by at least one half of the respondents with segment reporting (73%) and responsibility reporting (64%) being the most dominant. A small manufacturing company indicated that it assigned profit and loss responsibility at several layers, as well as assigning responsibility to such cost centre activities as human resources and information technology. A mid-size automation firm with three businesses reported:
“Each of our business unit managers is responsible for the profit and loss of their business unit. Within each business unit, a "project margin" is computed for each project carried out by the unit then there is an "operating margin" that is computed by taking the total project margin and subtracting the corporate overhead allocation charges.”
While more than half of the participants report using transfer pricing, it is noteworthy that it is not used in the “managerial” sense of pricing between profit centres. Rather, it is utilized almost solely as a tax liability management tool. None of our respondents indicated using the balanced scorecard (BSC) model of financial,
customer, internal process, and learning and growth categories for measuring
performance. However, all of the respondents indicated using a mix of financial and non-financial metrics that they commonly described as key indicators or critical
sophisticated measurement system. For example one respondent at a manufacturing company noted:
“We look at utilization. We will look at profit margins at a job level, so the actual project margin; and we will also look at operation margin. We look at other things
such as… just sort of general operational metrics. So we’ll look at things like our
hiring ratios. We will look at our labour turns. We will look at our health and safety track record. We’ll look at our... well, there is an effectiveness ratio. We’ll look at equipment utilization, breakdowns, and a variety of different things.”
Another respondent indicated that her company uses a series of metrics related to human capital management:
“So the concept behind a talent management metrics is to take a look at how our resourcing level is changing over time, to look at our bank of knowledge so, you know, how many years of experience do we have within the team? What are the demographics of the team? How many people have we hired in the periods? How many people have we lost? What we’re trying to do with these metrics is two things. One is make sure that we’re effectively managing our resources and providing the right opportunities; making sure that if there are any issues within the team that we’re addressing it, and usually the metrics will unfold... will show trends. The other side is we also want to make sure that we’re effectively hiring up front. So are we going after the right types of people?”
Analysis for Decision Making
Variance analysis is widely used and almost always related to a comparison
between some element of the operating budget and actual results. Importantly, the analysis did not involve calculations commonly associated with flexible budgets where variances are adjusted for the effects of changes in input or output levels. One
respondent indicated:
“We compare actual vs. master budget - particularly for labour cost - but this analysis is not related to activity levels.”
Overhead analysis almost always involved a comparison between the budgeted
indicate that he/she compared total applied overhead to incurred overhead and performed an analysis of over/under applied overhead. A consistent theme was that overhead costs may be tracked but they were seldom analyzed in much detail. The following is a typical response:
“Pools of corporate overheads and business related overheads are tracked
and compared to budget. However, there is no attempt to compare actual vs. applied overhead at the project level.”
Surprisingly, discounted cash flow analysis and cost behavior (CVP) analysis
were only infrequently utilized. However, a widely used tool by all organizations is
financial statement analysis (FSA). All of the respondents indicated that they employed
some form of FSA and 9 of the 11 firms used FSA at a moderate or heavy level. Most organizations focused on those financial statement items that were most critical to them. Items relating to cash and gross margins were often mentioned.
“Cash is king. We track outstanding receivables and all facets of operations that impact cash. In sum, we do a ton of financial analysis. We’re watching just about everything including currency hedges.”
“Gross margin at the project level is critical. Any company we ever had a
problem with and you had to fix… you know, it’s pretty much always related to
its gross margin. The other thing that you have to watch and manage very aggressively in our business is cash. We have large clients that are very good
at not paying and when I say “not paying”… they ultimately pay, but if I can say
if there’s one trend since 2008 it is that large corporations governments, etc., have become very good at holding onto money for a long time.”
“We perform monthly trend analysis on: (1) gross margins; (2) contribution margin; (3) operating income; (4) EBITA; (5) cash cycle components (A/R
turnover, A/P turnover, and inventory turnover).”
Reasons Management Accounting Techniques Not Used
RQ2: For common MA techniques taught to business students at Canadian post-secondary institutions, but not commonly used by Canadian SME’s, what are the reasons for the lack of use?
As reported in Table 3, there are several techniques that nearly two-thirds or more of our respondents indicating not using at all: target costing (64%), quality costing
(73%), activity-based costing (82%), flexible budgets (91%), the balanced scorecard
(91%), discounted cash flow analysis (82%) and cost behavior analysis (73%). In the
sections that follow, we discuss the rationale provided by our interviewees for not using each of these techniques.
Costing Techniques
The most common reason provided for not using target costing was that the company was not a price-taker but instead, was able to set prices for its products or services. Common reasons for not using quality costing were that the company’s
costing system had not yet developed to the point of tracking quality costs or that those costs were deemed to be immaterial and thus did not warrant separate recording and analysis. One respondent indicated her/his company did not track quality costs because he/she saw little value in them for decision-making purposes:
“To be honest with you, it’s not something where you’re going to look at and say,
well, should we spend a percent less, or that sort of thing. The cost of failure in our business is huge, so you do what you have to do to make sure it’s right, so it’s not something that’s going to be subjected to analysis.”
For most of the companies that did not use activity based costing, the reasons provided were that they have too few products or services to justify use of a more sophisticated costing system, or that most of their product or service related costs are direct costs. An interviewee at a medium size company, where activity-based costing seemed
“A cost benefit analysis on that (activity-based costing) is going to be hugely negative. I can’t even come up with any advantage of us doing that. We’d need a fleet of freaking people just to track it.”
Flexible Budgets
Flexible budgeting represents the least used technique by our respondents with
only two SME’s employing it and even then, their use was limited. Interestingly, the respondents indicated that rather than restating the budget to reflect actual activity levels, they relied heavily on developing forecasts as a forward-looking planning tool. That is, preparing flexible budgets as a means of better understanding what had already happened was viewed as less valuable than using changes in activity levels to forecast future revenues, expenses and cash flows. Comments in keeping with this view follow:
“We might come up a revised forecast of what we think we’re going to do, but the budget for performance measurements doesn’t change.”
“We do what we call the forecast, so we have a budget that’s kind of cast in stone, and then a forecast that I tweak every month, but the forecast is everything.”
Another respondent implied that he/she believed the cost of preparing flexible budgets exceeds the benefits of doing so:
“The first thing you do is adjust the operation. We don’t sit around coming up with a bunch of paperwork.”
Balanced Scorecard
No respondents indicated using the BSC framework for measuring performance with the most common reason for non-adoption being that the technique was simply too complex for smaller companies. Responses from two interviewees highlight this
“So we went through the process of trying to put in a balance scorecard the first
time… well, within the first few months I joined the company it was a very, very,
cumbersome process to go through. What we do now is a simpler approach.”
“Yeah, it’s not really a balanced scorecard. We use a number… of concepts of
the balance scorecard thing, but it’s not… for a lot of our smaller companies it’s
not as applicable.”
The next most common reason for not using the BSC was that the four categories (financial, customer, internal processes, learning and growth) used in the framework were too restrictive or not applicable to the company’s operations.18
Discounted Cash Flow Analysis
The two most common reasons for not using discounted cash flow analysis
(DCF)provided by our respondents were either that capital expenditures were relatively small or that the type of capital spending was not discretionary, but rather a necessity (e.g., server expansion) not requiring sophisticated analysis. The following quotes illustrate the rationale for not using DCF analysis provided by many of the respondents:
“Our capital projects are very short in nature on the terms of their
implementation, and typically they’re not big dollars so we don’t do a lot of formal analysis on them.”
“Do we need more storage – yes or no? It’s not really like we’re looking for a return. It’s just something we have to do.”
“Yeah, it’s not really like, “Okay, if we get this equipment what’s the payback for it?” Most of the cap-x we’re doing is monitors are broken; we need to replace them. We need new PC’s. We need that kind of stuff. On occasion maybe there’s something that comes up where there might be a business case required, but it’s the exception to the rule.”
Cost Behavior Analysis
18Kaplan and Norton (1996) do suggest that companies can/should tailor the BSC framework to suit their operations, including using different perspectives where deemed appropriate. Accordingly, the adaptation of the BSC framework employed by our respondents who felt the generic four-perspective template was too restrictive is not inconsistent with how Kaplan and Norton (1996) envisioned its use.
Most of our respondents indicated that they did not do any formal analysis of cost
behavior with respect to identifying fixed versus variable (or semi-variable) costs, and by
extension, tended not to use cost-volume-profit (CVP) techniques such as break-even
analysis. The primary reason provided for not analyzing cost behavior patterns was that
the management team intuitively knew whether costs were fixed or variable given the nature of operations. For example, respondents indicated:
“The majority of our costs are variable. We have very few fixed costs.”
“The way I look at it, the way we look at our cost structure, we really don’t… we
only have a few instances of what I would consider really variable costs.
Everything else is either fixed or semi-fixed, so we kind of look at it on a case-by-case basis.”
Interestingly, one non-manufacturing company, a developer of web-based applications for smartphones indicated that CVP analysis, as typically taught to
business students, is difficult to apply as an analytical tool in settings where expenses and revenues are not temporally linked. For example, in her/his company, revenue comes in the form of advertising fees from companies who place ad links on the app; a fixed fee is paid by the advertiser per “hit” on the ad link by the app user. Advertising fees can fluctuate wildly from one month to the next with limited controllability by the app developer in the short-run. However, the costs incurred by the company are largely fixed, consisting of salaries paid to the app development team. This type of business model, with highly variable revenues that in the short-run are not strongly causally
related to the costs incurred, limits the value of traditional CVP analysis. As noted by the respondent:
“Our revenue just goes up and down. So our revenues and our costs aren’t
advertise, but then our users just plug away using it, so our costs are somewhat stable each month.”
Additional Analysis
Recognizing the limitations of sub-dividing an already small sample, we performed two additional analyses to determine if other patterns of management accounting technique usage appear in our data. Specifically, we: (a) compared small firms (n = 5) versus medium firms (n = 6) (see Table 4) and (b) compared
manufacturing (n = 6) versus non-manufacturing (n = 5) firms (see Table 5). Insert Tables 4 and 5 about here
Small versus Medium Size Firms
This analysis compares small firms (<100 employees) to medium sized firms (>100 and <500 employees). We expected that as firm size increased so too would the usage of management accounting techniques. Key observations from this analysis indicate:
• Medium sized firms tend to have both a higher frequency of general (job) costing
system adoption as well as utilizing them in a more intense manner (moderate +
high categories) than do small firms.
• Operating budgets are utilized heavily by both small and medium sized
organizations. Only one (small) firm indicated that it was not using this planning and control tool.
• Medium sized firms adopt capital budgets more frequently than small firms. • As firms reach medium size they are more likely to adopt responsibility centre
reporting techniques such as segment reporting, responsibility centre reporting,
cost allocations and transfer pricing and to utilize them more intensely.
• Variance analysis is used widely by both small and medium sized organizations.
The difference is that medium size firms devote more time and effort to their analysis.
Our final analysis compares non-manufacturing firms (n = 5) with firms indicating that at least 20% of their revenue was derived from manufacturing operations (n = 6).19 We noted earlier that manufacturing’s contribution to Canada’s GDP is only about one half of what it was in 1960. Since management accounting was largely a product of the manufacturing era, we expected those firms with manufacturing operations to rely more heavily on management accounting techniques than firms in the hi-tech or automation sectors. Since we had an almost equal number of manufacturing and
non-manufacturing firms, this provided us an opportunity to make such a comparison. Key observations from this analysis indicated:
• There is a striking difference between non-manufacturing and manufacturing firms in the adoption rates of management accounting techniques described in Table 3. Interestingly, these differences are much greater than those noted between “small” and “medium” sized firms.
• These differences exist across all four areas (costing systems, budgeting
systems, responsibility centre reporting and analysisfor decision making) with
the biggest differences occurring at the level of utilization of standard costing, variable costing, capital budgets, segment reporting, responsibility centre reporting and cost behavior analysis.
DISCUSSION
SME’s are a large and important component of the Canadian economy but despite this, there has been a general lack of research on their use (or lack thereof) of MA techniques. Utilizing in-depth interviews with senior management at 11 companies, we were able to explore the use of management accounting techniques by SME’s across several industries in Southwestern Ontario.
19 In a follow-up communication (after the field interviews) to the respondent companies that have both manufacturing and non-manufacturing operations, we asked interviewees to provide the proportion of revenues derived from manufacturing versus non-manufacturing activities.
While acknowledging that our research is limited by a small sample size and a limited geographic area, we believe that our interviews revealed some interesting observations. For example, of the 19 management accounting tools, only four were utilized at either a moderate or high rate. And arguably, one of these, financial
statement analysis, is not a MA tool, per se. SME’s appear to value the importance of costing systems, operational budgets and the information gained from analyzing the variance from budget expectations. Beyond that, the utility of management accounting procedures seems marginal.
Since this is a pilot study involving a limited number of firms concentrated in a particular geographic region, we recognize that generalizations are not in order and future work is needed to expand the breadth of this study. For example, we are now beginning a replication of this study in the Australian SME environment. However, if what we have observed is replicated in other settings or jurisdictions, there may be some important implications. First, our results (along with those documented in our literature review) raise questions about the usefulness of many management accounting techniques to SME’s. Clearly, many techniques are not viewed as sufficiently value-added (i.e., they fail the cost-benefit test) for SME’s to adopt. This then leads to the question as to why so many techniques are not being adopted. A simple answer is that most SME’s have simply not yet achieved the critical mass in terms of the scale of operations where they can benefit from many management accounting tools. But since so few SME’s ever achieve large (>500 employees) status, this does not hold out great promise for the role of management accounting in smaller organizations. Furthermore,
as Blank (2012) has argued, the focus of SME’s must be less on traditional planning and control procedures and more on searching for the appropriate business model.
Second, to the extent our results do generalize, it raises important questions as to what changes to the curriculums of post-secondary management accounting
education programs should be contemplated. For example, to what extent should there be a continued emphasis on techniques that appear to be only marginally used by SME’s (e.g., flexible budgeting, discounted cash flow analysis, etc.)? Further, should other techniques such as financial statement analysis or forecasting be given greater emphasis since their use in practice seems high? Finally, what should the role of groups such as accounting practitioners, consultants and accounting bodies – particularly, CMA Canada and provincial CMA’s - be in supporting SME’s? Our plan, once extensions of this research are accomplished, is to bring representatives from SME organizations together with academics, small accounting practitioners, consultants and the accounting bodies together for a day long symposium to address a number of these issues.
While we acknowledge that our preliminary results may raise more questions than they answer, we believe these are important questions that must be addressed both with respect to how we educate our future management accountants, and how we support their continuing professional development.
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Table 1: Characteristics of Participating SME’s and the Interviewees Interviewee
Industry Size Employees Number of Title Experience Years Ownership 1
2
Hi Tech Small 17 CEO 25 Private
2 Automation Medium 270 CFO 16 Private
3 Manufacturing Medium 225 CEO, CFO, Controller
27,12,10 Private
4 Hi Tech Small 23 CFO 26 Private
5 Hi Tech Medium 500 CFO 12 Private
6 Manufacturing Small 84 CFO 8 Private
7 Automation Medium 240 CFO 16 Public that
went Private
8 Manufacturing Medium 100 CEO 27 Public
9 Hi Tech Small 13 CEO 9 Private
10 Automation Medium 220 CFO/VPM 13 Public
Table 2: Management Accounting Techniques Included in the Interviews
Technique
Product or Service Costing
1. Use of a formal costing system (job-order, activity based, process costing, hybrid) 2. Standard costs 3. Variable costing 4. Quality costing 5. Target costing Budgeting 6. Operating budgets 7. Flexible budgets 8. Capital budgets
Responsibility Centre Reporting 9. Segment reporting
10. Responsibility centre reporting 11. Cost allocations
12. Transfer pricing
13. Balanced scorecard or other measurement system Analysis for Decision-Making
14. Variance analysis
15. Discounted cash flow analysis 16. Overhead analysis
17. Cost behaviour analysis 18. Cost-volume profit analysis 19. Financial statement analysis
Table 3 -‐ All Firms Analysis
No + Lo Mod+HI Costing Systems No Yes Lo Med Hi Total No Yes Lo Med Hi
Existence of costing system 3 8 2 2 4 11 27% 73% 18% 18% 36% 45% 55%
Standard Costs 6 5 1 3 1 11 55% 45% 9% 27% 9% 64% 36% Variable Costing 4 7 4 2 1 11 36% 64% 36% 18% 9% 73% 27% Target Costing 7 4 1 1 2 11 64% 36% 9% 9% 18% 73% 27% Quality Costing 8 3 1 2 0 11 73% 27% 9% 18% 0% 82% 18% Activity-‐based Costing 9 2 2 0 0 11 82% 18% 18% 0% 0% 100% 0% Budgeting Systems Operating Budgets 1 10 2 2 6 11 9% 91% 18% 18% 55% 27% 73% Flexible Budgets 9 2 0 2 0 11 82% 18% 0% 18% 0% 82% 18% Capital Budgets 6 5 4 1 0 11 55% 45% 36% 9% 0% 91% 9%
Responsibility Centre Reporting
Segment Reporting 3 8 2 2 4 11 27% 73% 18% 18% 36% 45% 55%
Responsibility Centre Reporting 4 7 1 1 5 11 36% 64% 9% 9% 45% 45% 55%
Cost Allocations 5 6 1 2 3 11 45% 55% 9% 18% 27% 55% 45%
Transfer Pricing 5 6 2 4 0 11 45% 55% 18% 36% 0% 64% 36%
BSC or other performance reporting system0 11 8 3 0 11 0% 100% 73% 27% 0% 73% 27%
Analysis for Decision Making
Variance analysis 1 10 2 7 1 11 9% 91% 18% 64% 9% 27% 73%
Discounted Cash Flow Analysis 9 2 1 1 0 11 82% 18% 9% 9% 0% 91% 9%
Overhead Analysis 4 7 2 4 1 11 36% 64% 18% 36% 9% 55% 45%
Cost Behaviour Analysis 8 3 1 1 1 11 73% 27% 9% 9% 9% 82% 18% Financial Statement Analysis 0 11 2 5 4 11 0% 100% 18% 45% 36% 18% 82%
Percentage Raw numbers
