THE USE OF ACCOUNTING INFORMATION SYSTEM AS A MANAGERIAL DECISION MAKING TOOL CASE STUDY: SOWEDA, BUEA
Project Details
Department | ACCOUNTING |
Project ID | ACC311 |
Price | 5000XAF |
International: $20 | |
No of pages | 82 |
Instruments/method | QUANTITATIVE |
Reference | YES |
Analytical tool | DESCRIPTIVE |
Format | MS Word & PDF |
Chapters | 1-5 |
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ABSTRACT
This research work highlights the result of a research carried out to examine the use of accounting information system as a managerial decision making tool in SOWEDA, Buea. The study sought to provide answers to whether management place importance on accounting information system provided by firms before making decisions?
A substantial aspect of the study involved collecting data through the instrumentation of questionnaires and interview. The data collected were classified and analyzed using the linear regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25. The hypothesis was tested through a correlation test, and it revealed that there is a weak positive relationship between the variables (r=0.2873). This result showed that accounting information is a tool for management decision making hence, the null hypothesis was rejected and the alternate hypothesis accepted. Based on the findings, it was recommended that managerial decision making in organizations should be an offspring of accounting information.
KEYWORDS: Accounting information system, management, financial statements, decision making.
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Accounting is fundamentally a measurement and communication process used to report on the operations and performance of organizations. In other words, it is concerned with the discipline of summarizing, recording, analyzing and interpreting economic events and other financial activities. This process is performed by accountants who furnish management with the relevant information needed for effective and efficient decision making as to contribute to the quest for means of surmounting industrial, commercial, governmental and academic problems inherent in a dynamic and volatile socio-economic and political setting. The Financial Accounting Standard Board (FASB) defines information as the backbone of any business that is capable of making a difference in a decision by helping decision makers to form predictions about outcomes of past, present and future events (it has a predictive value) and also to correct or confirm prior expectations (it has a feedback value.) This is because reliable information is necessary before a sound decision involving the allocation of scarce resource (land, labour and capital) can be made, that is why accounting profession is dynamic and there is always the need for an accountant to continually update his/her knowledge of accounting portfolio. Accounting information is valuable because it can be used to predict the financial consequences of each alternative
course of action. An organization needs quantitative information to function or make decisions. For any organization of any type, be it small, medium or large, service or manufacturing, to survive in this dynamic and global world, there is need for proper management of information. Therefore, information is the backbone of any business. However, there is need for information to be well process, and the means to process information is through an integrated set of component called an information system. Thus, information system is the combination of different component to perform a specific function and basically it can be sourced from both internal and external.
According to Elvisa and Erkan (2015), the most important part of management information system is the one that is concern with data processing, known as Accounting Information System (AIS). AIS involved identifying, recording, analyzing, summarizing and communication of economic information to its end user for decision making. Management uses the best available information system to provide management information which is used primarily to accomplish three broad purposes;
- To provide financial statement to the interest of external users,
- To plan the organizational activities and operations in both short and
Long run for strategic operations, and
- To control the result of its operations.
In financial accounting, the responsibilities of the accountant ranges from recording and analysis, summarizing and reporting the result of the activities of the organization to creditors, stock holders and prospective investors, government, labour, environmental organization and others. In the case of reports to external users, they are classified for general purpose; they are financial statement, the income statement, the retained earnings, the balance sheet and the statement of financial position. People who protest or enhance their investment in the organization as by other who have a special interest in it use this statement. In management accounting, accountants provide information for use by office within the organization (the managers) rather than for use by others outside the organization, such information is mainly decision making concerning the internal function of the organization. Management accounting also provides information to the decision makers (managers) to help it in use of resources to attain the organizational objectives by:
- Managing and reducing risks
- Safeguarding the organizations assets
- Complying with legislations, rules and standards
- Preparing financial statements
- Forecasting
- Formulation of policies
- Planning and controlling the activities of the enterprises
- Disclosure of employee’s area of specialization and
- Decision taken alternative cause by action.
Management and financial accounting may be understood by considering the basic goals of financial accounting is to direct forms of operations to maximize income the period measure net income used by the management in making decision to avoid what may be considered as an unwise decision to external user or vice versa.
According to R. Terry, management is a process “consisting of planning, organizing, actuating and controlling, performed to determine and accomplish the objectives by the use of people and other resources”. According to this definition, management is a process or a systematic way of doing things. The four management activities included in this process are: planning, organizing, actuating and controlling. Planning means that managers think of their actions in advance. Organizing means that managers coordinate the human and material resources of the organization. Actuating means that managers motivate and direct subordinates. Controlling means that managers attempt to ensure that there is no deviation from the norm or plan. If some part of their organization is on the wrong track, managers take action to remedy the situation.
To conclude, we can say that various definitions of management do not run contrary to one another. Management is the sum-total of all those activities that (i) determine objectives, plans, policies (decision making) and programs; (ii) secure men, material, machinery cheaply (iii) put all these resources into operations through sound organization (iv) direct and motivate the men at work, (v) supervises and control their performance and (iv) provide maximum prosperity and happiness for both employer and employees and public at large.
The main activity of a manager consists in making decisions. It is well known that the decision in management is the process of choosing between two or more alternatives to accomplish one’s purpose. The managers are making scheduled routine decisions which arise from the organization’s policy and strategic decisions, unscheduled, unique, stemming from the
organization’s strategy interrelated to environmental factors. The most of the management decisions are taken under the influence of external and internal environmental constraints. As the environment is constantly changing and the information is not always complete and available, management decisions can be made in certain, uncertain and risky conditions. Decisions made in uncertain and risky conditions (Rutherford-Silvers J., 2008; Dragomir, C., 2012; Stefanescu, R., 2013) are characteristic to complex, unstructured and unplanned problems, features of strategic management.
Making a decision implies the following of a set of principles which support the idea of adopting a philosophy in management (Petrescu, I., 2012) and the appropriate behavior at the workplace, called ethical decision, which considers that any manager must take into account three elements of morality in the decision-making process: moral recognition, moral evaluation and moral intention and action (Baumhart, 1961). These principles refer to a type of behavior which promotes adherence to its own control and transparency and vigilance against those who violate the principles of business ethics (taking bribes, secret negotiations etc.) (Casali, G.L., 2007, Pimentel, J.R.C. et al., 2010; Savur, S., 2013; Vardaman, J.M., et al., 2014).
May, 1980, described that decision making is the process of choosing from among alternative courses of actions, conclusion and so forth, according to some criterion or criteria adopted by decision-making is the prime job of managers. And for as long as men have been striving together to accomplish tasks of making decisions about scarce resources in uncertain situations, management has been practiced, and information has been necked. Making sound decisions is clearly an extremely important management function since they provide a basis for policy formulation and affect both the short and long term effectiveness of an organization.
Typically, a wide range of possible solutions and decisions can be found, and one of the manager’s key roles is to weight up these alternative opportunities and select. This is as result of the fact that he often has to make decision within the frame-work of his resources, directives from his superiors and the time scale available. Therefore, to make sound decisions depends, in the first place, on the manager having a clear picture of what he is trying to achieve or what the problem entails.
Making decisions is part of our every day’s lives and it is often one of the main functions of
management. Indeed, management and decision-making are often considered as an integrated tasks and management usually makes the major decisions of the organization (Young, 1982). Decision making process involves the selection of the best course of actions (Emmanuel et al., 1990). In order to decide on the best option, management has to judge the effectiveness of various alternatives based on some data (Bierman et al., 1986). For this reason, they often depend on financial and economic information gathered by management accounting. Management information system is indispensable tool for decision making process in today’s turbulent world. Today, organizations are advised to invest on information technology tools as it improves their efficiency, effectiveness and their overall performance. In order to circumvent financial disasters through false and ineffective decisions, there is a big pool of financial tools, which are available to support the management decision making. Nevertheless, accounting tools implemented vary from one firm to another. One tool that proved to be very effective in one firm might fail for another one. Different information are needed for these diverse purposes, therefore organizations have to concentrate on various accounting tools to support their decisions-making process.
To emphasize the importance of accounting information to the business management has only been made possible by accounting information, inevitably, business is financially oriented; It is a process of using money to make money. No management can escape having to pay out money for materials and services so as to be able to collect money in due course from the sale of its own products or services. No management can avoid the necessity if it is to stay in business, for making a profit through an excess money income over money outgo. And no management can succeed in doing this without accounting information for use in planning and control.
Performance can be seen as the measurement of the overall organization results however economical a company has used the assets from its primary mode of business to get revenue. It represents the accomplishment of a given task that’s measured using predetermined standards of accuracy, completeness, efficiency and effectiveness (Hicks & Niehans, 1998). Performance is measured using key financial ratios such as Return on Sales (ROS) which is profit from the average sales income, Operating Expenses/Operating Incomes (OE/OI) in total refer to those expenses that are resulted from the company operations and operating incomes are also those incomes that are obtained through company’s operations, either capital operation or non-capital, Return on Assets (ROA) to measure the productivity of an asset and Return on Equity (ROE)to measure the profit secured for the owners of a business unit.
These performance ratios are inbuilt functions in most of business managing software. A proper performance provides a full range of accurate and reliable information to compare the actual performance of the company’s activities through specific indicators which are to be obtained from the actual performance and compared either in specific percentages or specific targets and thus determine if there are any deviations (Aldalayeen et al, 2013).
The American Accounting Association (1966) also defined accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information”. Another definition, which is widely accepted, is by the American Institute of Certified Public Accountants (1970) defined accounting as “the art of recording, classifying and summarizing an event which is in part at least of a financial character and interpreting the result thereof”. The above definition place emphasis on the use of accounting information for evaluating the results of the past and present activities and making decisions concerning future actions. The information is primarily financial and generally stated in monetary terms.
It is the process by which the profitability and solvency of an organization can be measured and also periodic information needed as a basis for making business decision and appropriate control that will enable the management to guide the organization on a profitable and solvent course. The accounting information is prepared and presented in form of financial statement in accordance with the accounting standard issued by the Nigerian Accounting Standard Board Act (2003) which are the means of conveying to management and interested outsiders a concise picture of the profitability and financial position of the business. The form of preparing and presenting accounting information includes the following; the profit and loss account, balance sheet, income statement etc. Hence, accounting is divided into four (4), namely;
- Financial accounting
- Cost accounting, and
- Management accounting
- Environmental or Sustainability accounting
According to Leopold (1982), financial accounting “is concerned with providing information on the financial activities of the organization for the benefit of both internal and external users”. It is also the classification, recording of monetary transaction of an entity in accordance with establish concepts, principles, accounting standard and legal requirement and presentation of a view of those translations during and at the end of an accounting period. While cost accounting on the other hand produce information about cost that are incurred by organization in running the organization so as to achieve the objectives on which it is set up.
Finally, Calvin (1982), stated that management accounting “is concerned with providing information to management for the purpose of planning or provision of information needed at all levels”. Management and creditors use these reports internally. Stamford (1978) stated that accounting information has played a role as “a tool for management decision making” because it function as “a historical record of contractual obligations between the outsiders with the end product in form of financial statements to report the financial status of an organization at a point in time”. However, the relevance of accounting information to effective management decision making in many organization is still not appreciated but with the test to be conducted in this research, the degree of accounting information system as a “tool for management decision making” shall be clearly understood.
- PROBLEM STATEMENT
Management who takes wrong decision always ends up not achieving their set
goals and objectives. Many managers who think that they can operate successfully without the use of information provided by their accountants, leads to economic failure such as liquidation of many banks. So, effective decision or management decision cannot be taken by managers if the information provided by their accountants is not properly adhered to.
Decision making has been described as a purposeful choosing, from a number of alternative causes of action. Accounting information system (AIS) provide managers with the necessary information they need. Management decision is one of the most important facets that pervade all organization and constitute its progress and/or failure in actualization of pre-determined goals and objectives (Clinton, Matuszewski & Tidrick, 2011). Interestingly, both financial and non-financial information are used by Management accounting and is generally intended for the use of internal users who use the information to make decisions that help achieve the goals and objectives of the organization. Financial information used by management accountants include sale growth, profits, return on capital employed and market shares, non-financial information include customer satisfaction level, production quality, performance of competing products and customer loyalty. Melissa Bushman (2007) opined that management accountants use both financial and non-financial information to aid business decision-making, in other words,
European Journal of Accounting, Auditing and Finance Research ___Published by European Centre for Research Training and Development UK (www.eajournals.org) business decision making is predicated on AIS. AIS is a set-up, or system that is primarily concerned with financial data gathering from internal and external sources, analyzing, processing, interpreting and communicating the result (information) for use within the organization so that management can make more effective and efficient plan, decisions and control operations.
Planning, decision making and control operations according to Priyia and Longnathan (2016), are challenges constantly confronted by management in running the affairs of the organization, especially knowing that resources are relatively scarce and limited. So, the need for good AIS must be made available for proper and accurate decision making. In making a sound decision, the management needs valuable and accurate information from its accountant. The accountant is at the services of the management by providing them with the necessary information they need for decision making. In recent times, it was observed that cases of mismanagement, fraud and irregularities prevail in the organization.
Green Wood and Hinings (2012) opined that there is evidence that reveal the influence of accounting information in decision making process. It emphasizes the importance of a holistic context and which, led to the integration of other institutional influence and multiple logics. The essence of using AIS is to enable managers make wise decision. AIS is also used to setup system of internal control to increase efficiency and prevent fraud in companies. AIS aid in profit making, budgeting and cost control. In a company, it is the duty of the management accountant to see that his company keeps good records and prepare proper financial regulations. Management accountants also need to keep up with the latest development in the use of computers and in computer system design. Accountants provide many special reports for management’s decision making. This function requires the gathering of both historical and projected data. Limited numbers of studies avails in international management research have focus on the role utilization of AIS play in the holistic context of decision-making strategies, processes and preferences. Based on the above, it will be necessary to research on the following research questions some of which include; how does AIS help managers to control fraud? How effective is AIS in management decision making? Therefore, in order to answer the above questions, the aim of the study is to examine how effective and efficient management uses AIS in making business decisions.
1.3 RESEARCH QUESTIONS
The Main Research Question
- What is the use of accounting information system as a managerial decision making tool?
Specific questions
- Are the disclosures of accounting information accurate and reliable?
- Is accounting information prepared with General Accepted Accounting Principle (GAAP)?
- Does accounting information as a tool for decision-making satisfy the
management?- OBJECTIVES OF THE STUDY
To provide answers to the research questions, we are guided by the research objectives.
The Main Research Objective
- The primary objective is to assess the use of the accounting information system as a managerial decision-making tool of SOWEDA.
Specific Objectives
The subsidiary objectives of this study are;
- To carefully look at the need for accounting information for management decision-making.
- To make suggestions as to the usefulness of accounting information to the users in general.
- The research seeks to know the extent to which the management of the organization under review has used the accounting information.