Strategic Management Accounting Techniques versus Cost ... · Strategic Management Accounting Techniques versus Cost-plus ... Activity based costing SMA TC MAS ... Strategic Management

Cairo University

Faculty of Commerce

Accounting Department

Strategic Management Accounting Techniques

versus Cost-plus Technique for Pricing Decision:

Exploring the Gap between Practice and Theory

A thesis submitted in partial fulfillment of the requirements for the

Master of Science in Accounting

Prepared by:

Rana Mohamed Shawky Genidy El-Sharawy

Supervisor:

Prof. Dr.

Said Yehia Daw

Professor of Cost and Management Accounting

Facualty of Commerce- Cairo University

2012

:فى سورة التوبه يقول هللا تعالي

حيم حمن الره الره بسم هللاه

إال تىصسوي فقد وصسي للا إذ أخسج انريه كفسوا ثاوي اثىيه إذ (

ال تحزن إن للا معىا فأوزل للا ما في انغاز إذ يقول نصاحب

ا وجعم كهمة انريه كفسوا وأيدي بجىود نم تسو سكيىت عهي

ي انعهيا وللا عزيز حكيم فهى وكهمة للا )انس

صدق هللا العظيم

(04)سورة التوبه ايه رقم

Examining Committee

Prof. Dr. Mohamed Mahmoud Yousef

Prof.of Cost and Management Accounting

Ex-President of Banisouif University

Prof. Dr. Said Yehia Daw

Prof. of Cost and Management Accounting

Faculty of Commerce- Cairo University

Prof. Dr. Amr Hussein Abd El-bar

Prof. of Cost Accounting

Ain- Shams University

Examining Committee Decision and Date:

Supervisor’s signature:

Prof. Dr. Said Yehia Daw

Prof. of Cost and Management Accounting

Faculty of Commerce- Cairo University

Committee

Chairman

Committee

Member and

supervisor

Committee

Member

IV

Acknowledgement

I am deeply indebted to my supervisor Prof. Dr. Said Daw, I am really

fortunate to have him as my supervisor and can never forget his patience,

generous and timely support.

My appreciation goes too to Prof. Dr. Mohamed Mahmoud Yousef for

accepting being a member of the examining committee.

Sincere appreciation goes to Prof. Dr. Amr Hussein Abd El-bar for

accepting being a member in the examining committee.

V

List of Contents

Subject Page

Examining committee………………………………………………………..

Acknowledgement……………………………………………………………

List of Contents………………………………………………………………

List of Figures………………………………………………………………..

List of Tables…………………………………………………………………

List of Abbreviations…………………………………………………………

Abstract………………………………………………………………………

III

IV

V

VIII

IX

X

XI

1. Chapter One: Introduction 1

1.1 Research problem

1.2 Problem statement

1.3 Research objective

1.4 Research hypotheses

1.5 Research design and method

1.6 Research scope

3

5

6

6

8

9

2. Chapter two: Evaluating Pricing Decision: A Review of Traditional

and SMA Approach

11

2.1 The appropriate MAS within the contingency approach framework

2.1.1. Traditional MAS optimality

2.1.2. The impact of contingencies on MAS: A contingency framework

2.1.3. The prominence of the SMA

2.1.4. SMA definition

2.1.5. SMA external orientation and the organization adopting policy

2.2 The optimal pricing strategy in a dynamic environment

2.2.1 Pricing strategies based upon organization's competitive position

2.2.2 Cost-Plus as dominant behavior for pricing

2.2.3 Permanence of the cost-plus approach

2.3 TC and attribute costing as a pricing techniques

2.3.1 Target costing

2.3.2 Attribute Based Costing

2.4 Organization's performance measurement

2.4.1 Different roles of performance measurement

2.4.2 The relation between financial and nonfinancial performance

measures

2.4.3 Financial and nonfinancial performance measures, a balanced

scorecard perspective

13

14

15

18

19

20

22

24

26

28

29

30

33

35

36

38

40

VI

3. Chapter three: Literature review

43

3.1 Literature addressing the relation between SMA and organizational

performance

3.1.1 Study of Cinquini and Tenucci (2007)

3.1.2 Study of Guilding et al. (2000)

3.1.3 Study of Roslender and Hart (2003)

3.1.4 Study of Bhimani and Langfield-Smith (2007)

3.1.5 Study of Lord (1996)

3.1.6 Study of Cadez and Guilding (2008)

3.1.7 Study of Bjornenak and Olson (1999)

3.2 Reviewing and analysis of the first group of literature

3.3 Literature addressing the pricing decision as a dynamic process

3.3.1 Study of Lucas and Rafferty (2008)

3.3.2 Study of Lucas (2003)

3.3.3 Study of Zeithaml (1988)

3.3.4 Study of Dodds et al. (1991)

3.3.5 Study of Monroe and Bitta (1978)

3.3.6 Study of Guilding et al. (2005)

3.4 Reviewing and analysis of the second group of literature

44

45

47

50

51

53

54

57

58

59

59

60

61

62

63

64

66

4. Chapter four: An empirical investigation of the relationships

among SMA techniques, cost-plus pricing and organizational

performance

69

4.1 Population of the study

4.2 Sample selection

4.3 Data collection

4.4 Descriptive explanation of the research model


4.5.1 The relation between SMA and organizational performance

4.5.2 The relation between cost-plus and organizational performance

4.5.3 The relation between contextual variables and techniques for

pricing

4.6 Variables measurement

4.6.1 Measuring the application of SMA techniques

4.6.2 Measuring the applications of cost-plus pricing technique

4.6.3. How to measure the organizational performance?

4.6.4. Measuring the contextual variables

4.7 Data analysis

4.7.1 Statistical analysis techniques

4.7.1.1 Data analysis using cluster analysis

4.7.1.1.1 Cluster analysis as a statistical technique

4.7.1.1.2 Using cluster analysis to divide the sample

4.7.1.2 Data analysis using path analysis

70

71

72

75

78

78

80

80

82

82

83

84

86

87

88

89

89

90

91

VII

4.7.1.2.1 Path analysis as a statistical technique

4.7.1.2.2 Path analysis to analyze the data collected

4.7.1.2.2.1 Confirmatory factor analysis

4.7.1.3 The structure building of the research model

4.7.2 Statistical results of data analysis

4.7.2.1 The results of testing the relationship between variables of the

first hypothesis

4.7.2.2 The results of the relationships between cost-plus and the

organizational performance

4.7.2.3 The relationships between contextual variables and the SMA

techniques on the organizational performance

4.7.2.4 The relationships between contextual variables and the cost-plus

on the organizational performance

4.8 Findings and discussion

91

91

93

96

100

101

103

104

106

109

5. Chapter five: Summary, conclusion, and future research

113

5.1 Summary

5.2 Conclusions

5.3 Future research

114

120

122

References

Appendices

123

VIII

List of Figures

Subject Page

Figure (2.1) Otley’s (1980) contingency theory framework

Figure (2.2) The main aspects of SMA

Figure (2.3) The six generic performance dimensions

Figure (2.4) Performance measures purposes

17

22

36

38

Figure (4.1) The general model

Figure (4.2) The specified model

Figure (4.3) The dendrogram

Figure (4.4) The first and final confirmatory model

Figure (4.5) The descriptive model

Figure (4.6) The final trial for the structured model with the

coefficients of each path

Figure (4.7) Regression weights of nonfinancial performance

components

76

77

92

94

96

97

103

IX

List of Tables

Subject Page

Table (4.1) The classification of manufacturing organizations in Egypt

registered in the industrial modernization centre

Table (4.2) Descriptive summary of collected data

Table (4.3) An index for the components used in the confirmatory

factor analysis

Table (4.4) Confirmatory factor analysis results

Table (4.5) Goodness-of-fit and adjusted goodness-of-fit

Table (4.6) The P-value of the paths of variables in final trial structured

model

Table (4.7) Most important goodness-of-fit index indicators for the

final trial structured model

Table (4.8) Comparison between the goodness of fit index between the

first structured model and the final trial structured model Table (4.9) Standardized direct effects between the variables Table (4.10) Standardized indirect effect between the variable Table (4.11) The relationship between the SMA and the organizational

performance

Table (4.12) The relationship between the cost-plus and the


Table (4.13) The extended relationship between the control variables

and organizational performance mediating the SMA

Table (4.14) The extended relationship between the control variables

and organizational performance mediating the cost-plus

71

72

93

95

96

98

99

99

100

100

102

104

106

109

X

List of Abbreviations

Term Abbreviation

Strategic management accounting

Target costing

Management accounting system

Balanced scorecard

Activity based costing

SMA

TC

MAS

BSC

ABC

XI

Abstract

This study examines the relationships among the strategic management

accounting (SMA) techniques, cost-plus pricing technique and the

organizational performance. The main objective of the research is to

enhance the organizational performance through the pricing decision

using either the SMA techniques or the cost-plus pricing technique. The

research also examined the extended effect of the control variables on the

organizational performance (financial and nonfinancial) through

mediating the SMA techniques and the cost-plus technique in the pricing

decision.

Cluster analysis and Path analysis were used to investigate the

relationships among SMA techniques, cost-plus pricing and

organizational performance. The data was obtained from cross-sectional

sample of Egyptian manufacturing organizations with a response rate of

27.5%.

Analysis of data indicated that SMA techniques adoption as pricing

techniques can enhance the organizational financial and nonfinancial

performance. However, the direct effect can be reflected more in the non

financial performance perspectives (customer satisfaction, internal

business process and learning and growth) than the financial

performance. Attribute costing has been found to enhance the

organizational performance more than the target costing (TC). Other

SMA techniques were excluded.

Cost-plus pricing technique also affects the organizational financial and

nonfinancial performance. The direct effect is reflected more in the

XII

financial performance and the indirect effect is showed on the

nonfinancial performance.

Keywords: Strategic management accounting; Cost-plus pricing;

Contingency theory; Cluster analysis.

Chapter One

Introduction

Strategic Management Accounting Techniques versus Cost plus Technique for Pricing Decision: Exploring the Gap between Practice and Theory

2

Chapter One

1. Introduction

The past two decades have witnessed a considerable change in managerial

accounting practice. From the traditional emphasis on financially oriented

decision analysis and budgetary control, managerial accounting has evolved

to encompass a more strategic approach that emphasizes the identification,

measurement, and management of the key financial and operational

activities. A similar evolution has occurred in the management accounting

research. Empirical studies of budgeting and financial control practices are

giving way to research on a variety of modern techniques such as activity

based costing (ABC), the balanced score card (BSC), strategic accounting

and control systems, and economic value performance measures

(International Federation of Accountants, 1998; Institute of Management

Accountants, 1999; Ittner and Larcker, 2001; Baines and Langfield-Smith,

2003).

Different functional departments possess power in imposing their

values/views in the management practices employed. This may be partly

attributable to the personalities and the internal dynamics of the particular

organization concerned. However, it may also be necessary to look beyond

the boundaries of the particular organization to the wider society, to explain

the origins and dissemination of various ‘institutions ’and the dispositional

power reflected in them.


3

1.1 Research problem

Traditional management accounting information might described as too late,

too aggregate and too distorted to be relevant for management’s planning

and control decisions (Johnson and Kaplan, 1987). Many of cost information

being produced annually with little or no useful information that can aid to

evaluate the organization’s performance. As a result many of erroneous

decision are made too, for example developing unprofitable products,

unnecessarily outsourcing, and making incorrect cost reduction or a wrong

pricing decision.

The recent past has seen considerable criticism of management accounting

practice. Critics’ primary concern is that the cost and management control

systems used in practice had lost relevance (Cooper, 1990; Johnson and

Kaplan, 1987; Kaplan 1984, 1986, 1988, 1990). Cost plus as a technique or

tool for pricing decision represents the traditional approach for pricing. On

the other hand, SMA techniques or tools represent the modified techniques

for pricing decision. The later include many techniques such as: TC and

attribute based costing.

Moreover, traditional management accounting has not responded to

developments in the technological and competitive environment, with the

result that internal accounting information is frequently inaccurate and

misleading. Contemporaneously, many commentators believe that a

significant gap has developed between traditional management accounting

practices and the normative literature (Otley, 1985; Scapens, 1985;

Choudhury, 1986; Edwards and Emmanuel, 1990).

The principal concern of these critics was that these traditional systems had

failed to keep up with changes in the business environment. In order to


4

restore the relevance of cost and management control practices, several new

techniques, including ABC, strategic costing, attribute costing, and TC, have

presented (Lamminmaki and Drury, 2001). Starting in the 1990s, researchers

have attempted to identify factors that may influence a firm’s decisions to

adopt SMA and cost management control techniques.

While the recent past has seen increased interest in SMA, the area is still

under defined and no universally accepted SMA framework exists (Nyamori

et al., 2001; Roslender and Hart, 2003). A review of the literature suggests

two perspectives on SMA can be taken. Firstly, SMA can be conceived of as

comprising a set of strategically oriented accounting techniques. Secondly,

SMA can be viewed as concerned with the involvement of accountants in

corporate strategic decision-making processes (Cadez and Guilding, 2008).

The concept of SMA requires management accounting to focus on

performance measurement using strategic rather than tactical indicators

(Bhimani, 1994). Basically, strategies need to be formulated in accounting

language and supported by the authority of accounting techniques, indicators

and reports if they are to be quantified, developed and monitored.

Management accountants need to adopt a more strategic perspective by

reporting information relating to the competition and the market place

(Boons, 1994; Bhimani, 1996).

Many accountants seem to have accepted the existence of a ‘reality gap’

between management accounting’s conventional wisdom, based on the

neoclassical economic theory of the firm and actual business practice. Whilst

the former recommended the use of a decision relevant cost approach to

pricing decisions, the latter is believed to be dominated by a full cost plus


5

approach to pricing. In accepting the existence of a reality gap, accountants

do not seem to have addressed the arguments of economists, the

accountants’ and economists’ respective positions and argues is strongly

supported by the conflicting empirical evidence. On the other hand, the

empirical evidence supporting neoclassical price theory is not strong and

much of the research that generated it is methodologically flawed. These

arguments seriously undermine the research findings of accountants that

have given rise to the belief in such a gap. The reality gap became apparent

as soon as accounting researches began to systematically conduct empirical

studies of management accounting practices. Such studies have been

regularly replicated up to the present day (Drury and Tayles, 2005).

Traditional management accounting practice in the hands of one group may

be performed differently in the hands of another. In this sense, managers do

not just discuss the ends and means efficiency of this or that policy

independent of their own value assessment of the policy; rather they infuse

their contribution with their own values. Traditional management accounting

is a powerful way of analyzing, interpreting and formulating action plans,

and it may well be value neutral; but managers are not value neutral

(Rafferty, 2007).

1.2 Problem statement

The main question of this work is to find out what are the prevailing

techniques used in the Egyptian environment in the pricing decision?. The

research address choosing the pricing techniques, the first is the cost-plus;

the second is by using different strategic management tools. Moreover

assessing the different modified strategic management tools and cost-plus


6

can be used individually or side by side determining which policy will be the

fitter in the pricing decision and to the organization success.

1.3 Research objective

The main objective of the research is to enhance the organizational

performance through the pricing decision using either the SMA techniques

or the cost-plus pricing technique. By achieving the main objective of the

research, the following sub-objective may be achieved:

Enhancing the output of the accounting information system by obtaining

more accurate information (cost information, market information, etc.) in

order to increase the value of the firm.

Rationalizing the decision making model through evaluating the different

models used.

Enhancing the organizational performance (financial and nonfinancial) of

the organization in which SMA or cost-plus techniques are used.

Exploration the Egyptian environment and which techniques are prevailing

in the pricing process.


Based on research problem and research objectives, and after reviewing and

evaluating the literature, the following hypotheses are formulated;

H01: SMA as a pricing technique has no significant impact on


H01a: SMA as a pricing technique has no significant impact on

organizational financial performance


7

H01a1: Attribute costing as a SMA pricing technique has no

significant impact on organizational financial performance

H01a2: TC as a pricing technique of SMA has no significant impact on

organizational financial performance

H01b: SMA as a pricing technique has no significant impact on

organizational nonfinancial performance

H01b1: Attribute costing as a SMA pricing technique has no

significant impact on organizational non-

financial performance

H01b2: TC as a pricing technique of SMA has no significant impact on

organizational non-financial performance

H02: Cost-plus for pricing has no significant impact on organizational

performance

H02a: Cost-plus for pricing has no significant impact

on organizational financial performance

H02b: Cost-plus for pricing has no significant impact

on organizational non-financial performance

H03: Contextual variables have no significant impact on organizational

performance using SMA as a pricing technique

H03a: Size has no significant impact on organizational performance

using SMA as a pricing technique

H03b: Strategy for pricing has no significant impact on organizational

performance usin g SMA as a pricing technique


8

H03c: Kind of activity for pricing has no significant impact on

organizational performance using SMA as a pricing technique

H04: Contextual variables have no significant impact on organizational

performance using Cost-plus as a pricing technique

H04a: Size has no significant impact on organizational performance

using Cost-plus as a pricing technique

H04b: Strategy has no significant impact on organizational


H04c: Kind of activity has no significant impact on organizational


1.5 Research design and method

Quantitative research methods are used throughout this work. Quantitative

research is all about quantifying relationships between variables. An accurate

estimate of the relationship among variables needs a sample of hundreds or

even thousands of subjects.

The work can be considered as a scientific work that consists of three parts. The

First part includes three chapters. This part represents the theoretical part of the

thesis. Chapter two includes background of the research variables. In chapter

three the researcher addresses the literature review of the thesis. Literature

review is classified into two groups. The first group is the studies addressing the

relation between SMA and organizational performance. The second group is the

studies addressing the pricing decision as a dynamic process.

The second part of the thesis represents the empirical part of the work. The

research method applied in the thesis is a survey. The research population is

the private and the public organization in Cairo and Giza governorates; the

Documents

Strategic Management Accounting Techniques versus Cost ... · Strategic Management Accounting Techniques versus Cost-plus ... Activity based costing SMA TC MAS ... Strategic Management