The application of management accounting in micro and small enterprises

V. Suryaputra

Parahyangan Catholic University, Bandung, Indonesia

ABSTRACT: The purpose of this research is to investigate how management accounting is applied in micro and small enterprises in Bandung and its surrounding areas in Indonesia.

1 INTRODUCTION

1.1 Background

The growth of micro and small enterprises (MSEs) in Indonesia has been mushrooming. They create a strong competition both between themselves and with medium and large enterprises. In order to win the competition and keep the business going, the MSEs must be highly productive. However, Mourougane’s (2012) work indicates that micro, small and medium enterprises play in Indonesia are still struggling with productivity problems.

Studies have shown that management accounting can affect MSE performance (e.g., Ahmad 2017; Shields & Shelleman 2016). The more often the management accounting system is used to calculate the profitability of products or services and to assess the profitability of customers, the more positive and significant the impacts on return on investment are. This seems to imply that the application of manage­ment accounting can improve MSE performance.

The present research attempts to investigate how management accounting is applied in MSEs in Indo­nesia. It is expected that the findings can help improve their performance and productivity. This research is also particularly useful for other researchers whose interests and concerns are related in one way or another to the field of the same kind as that of this research.

2 RESEARCH METHOD

This research employed a descriptive study design. The aim was to describe the application of manage­ment accounting in micro and small enterprises in Indonesia. The samples were 30 micro and small enterprises in Bandung selected out of 300 thousand (data from www.jabarprov.go.id) randomly. Data were collected through questionnaires and interviews in January - June 2018.

3 SMALL AND MEDIUM ENTERPRISES (SMES)

In Indonesia, small and medium enterprises (SMEs) are defined in many different ways and from many different perspectives.

1) Ministry of Cooperatives and Small and Medium Enterprises (Menegkop and UKM) classifies MSMEs based on their net worth as follows:

• A small enterprise (UK), including Micro Enterprises (UMI), is a business entity having a net worth of IDR 200,000,000, excluding land and building of business premises, and has annual sales of up to IDR 1,000,000,000.

• A medium enterprises (UM) is a business entity owned by an Indonesian citizen with a net worth between IDR 200,000,000 and IDR 10,000,000,000, excluding land and buildings.

2) Law of the Republic of Indonesia Number 20 of 2008 defines SMEs based on the amount of assets and turnover per year as follows:

• A micro enterprise is a productive business owned by individual and/or individual busi­ness entity fulfilling micro business criteria as regulated in this law.

• A small-scale business is a stand-alone pro­ductive economic enterprise conducted by an individual or a business entity that is not a sub­sidiary or not a company owned, controlled, or a part, directly or indirectly, of a medium­sized or large-scale business that meets the cri­teria small business as referred to in this law.

• A medium-sized enterprise is a stand-alone productive economic enterprise, carried out by an individual or a business entity that is not a subsidiary or not a company owned, controlled, or a part, directly or indirectly, of a small busi­ness or large business with net worth or annual sales proceeds as provided in this law.

Table 1.

3) Bank Indonesia through Bank Indonesia Circular Letter no. 3/9/Bkr of 2001 defines a small busi­ness by referring to Law No. 9 of 1995, which is small scale business criteria based on fixed asset value (excluding lands and buildings) of IDR 200 million with maximum turnover per year of IDR 1 billion. Based on Presidential Decree No.10 of 1999 on medium enterprises, the maximum fixed asset criterion (excluding land and buildings) of a medium business ranges between IDR 200 mil­lion and IDR 10 billion.

4) According to the Ministry of Industry and Trade, businesses with asset value (excluding land and buildings) of less than IDR 200 million are called small industries, whereas a business with asset between IDR 200 million and IDR 5 billion is classified as a small and medium enterprise.

5) Ministry of Finance, through Ministerial Decree number 316/KMK.016/1994 dated June 27, 1994, defines a small business as an individual or busi­ness entity that has engaged in business/sales turnover per year as high as IDR 600,000,000 or assets of up to IDR 600,000,000 (excluding land and buildings occupied). They could be:

a. Field of business (Fa, CV, PT, and coopera­tive), and

b. Individuals (craftsmen/home industry, farm­ers, fishermen, forest encroachers, miners, traders of goods and services).

6) Statistics Indonesia (BPS) classifies a business based on the number of workers as follows:

• Micro-enterprises (households) are busi­nesses with 1-5 people.

• Small businesses are businesses with 6-19 employees.

• Medium enterprises have 20-99 employees.

• Large businesses have workers at least 100 people.

In this study, small and medium micro enter­prises are defined based on their annual turnover in accordance with Law No.20 of 2008 and based on the number of employees according to Statistics Indonesia.

4 MANAGEMENT ACCOUNTING

Management accounting helps managers with their financial statement creation (Horngren et al. 2015). According to Management Accounting Practices Committee (MAPC) management accounting is the process of identification, measurement, analysis, preparation and communication of financial infor­mation used by management for planning, evalua­tion, control in an organization and to ensure the ac-curacy of the use of resources and accountability.

The purpose of management accounting is to help managers plan and control the company’s current op­erations and hence helps make specific decisions and long-term plans (Horngren 1962). Management ac­counting is broader than cost accounting and is used for planning and control (Williams 1986).

The role of accounting is to help managers and professionals with the planning and controls within an organization and does not merely perform a book­keeping function (Birnberg 2011). Management accounting is different from cost accounting. Cost accounting is concerned with the cost measurement of the product whereas management accounting is rather a managerial-related activity (2003).

According to Keong (1997), the primary purpose of management accounting is to ensure that we un-der- stand how internal information in the form of fi-nancial data can be used to help businesses generate more profit. Kaplan and Johnson in a book entitled Rele­vance Lost advised the Chief Financial Officer estab­lished a simplified accounting management sys-tem to help them make important decisions (Pearl-stein 1988).

Management accounting is an abstract construct; therefore, the application of management accounting is usually seen from the use of methods (techniques) such as cost calculations, planning in the form of budget, control in the form of variance (compare ac­tual results with budget).

4.1 The use of management accounting outside Indonesia

Laureano et al (2016) conducted a study of manage­ment accounting practices in SMEs in Portugal, to find out which SMEs in Portugal belong to which cat­egory of Kaplan’s four stage model. The Kaplan model groups companies based on the level of devel­opment of their management accounting practices. Stage 1 uses insufficient methods for financial report­ing needs, stage 2 implements methods for financial reporting, stage 3 produces innovation and is relevant for management, stage 4 integration. The re-search results show that all studied SMEs have implemented management accounting methods for product valu­ation, but the method used is considered inadequate for decision making, 24.14% of them do valuation of products using direct cost, the rest using the basis of allocations relating to the amount of production, usu­ally using machine hours. None is using activity-based costing.

Studies on management accounting practices in SMEs were also conducted in Romania. The results of Cuzdriorean’s (2017) study; for example, indicate that most respondents use some (slightly) traditional management accounting methods, while modern ac­counting method uses are rather limited. The most commonly used traditional management accounting methods are budgeting systems for cost control and cash flow planning. The commonly used modern management accounting methods are benchmarking and reporting performance based on financial and non-financial size.

The results of a survey of 226 SMEs in Italy show that there is a positive correlation between firm size and diffusion of management accounting tools.

Ahmad and Zabri (2015) conducted research on the application of management accounting in medium-sized businesses in Malaysia. The results indicate that the use of costing system, budgeting system, and performance evaluation system is sig­nificantly higher than decision support and strategic management accounting. Traditional management accounting practice (MAP) is more commonly used than sophisticated MAP.

Shields and Shelleman’s (2016) research on the application of management accounting in micro enterprises in the US suggests that management ac­counting systems are implemented to facilitate deci­sion making, including calculating the profitability of products/services, taking action based on actual and budget performance comparisons, and assess­ment of customer profitability.

McChlery et al. (2005) conducted research on small business in Scotland. The results showed that only 54.8% of respondents made estimates of profits, and 53.6% made estimates of cash. Only 48.1% com­pared the budget with the actual results. 36.8% of respondents did not have a product cost calculation system.

It can be concluded that some SMEs in the above­mentioned countries demonstrate a limited technique use of management accounting, usually in the form of simple product cost and budget calculations.

4.2 The use of management accounting in Indonesia

There were several studies related to the use of man­agement accounting in small and medium enterprises in Indonesia. For example, Alliyah and Hidayat’s (2014) study indicate that 186 small and medium enter­prises in Rembang Regency have implemented man­agement accounting system. The study on 82 SMEs in Surabaya shows that, on a scale of 1-5, the measure­ment of management accounting resulted in the aver­age score of 2.1265 (low) (Surenggono & Djamilah 2016). 19 small and medium businesses in Yogyakarta are reported to use management accounting for plan­ning, control, and decision making, (Wirjono & Rahar- jono 2012). Research on 8 businesses of enting-enting gepuk in Salatiga indicates that the information used for business decision making is sales/income informa­tion, purchase information, cost information, profit and loss information, cash inflow information, and inventory amount information (Christian & Rita 2016). Purwati et al (2014) found that small and medium enterprises in Banyumas used management accounting make financial statements as requirements for propos­ing bank loans (Purwati et al. 2014).

The abovementioned studies may lead to a con­clusion that management accounting helps SMEs with decision making processes.

4.3 Management accounting indicators

Scholars used different indicators for management accounting. Shield and Shelleman (2016) use the abil­ity to calculate products/services, take remedial action if actual performance is not profitable relative to budgeted performance, assess customer profitability, compare actual and budgeted performance, calculate differences between actual and budgeted amounts, evaluate performance relative to the target, calculate breakeven point, prepare operating budget, use operat­ing budget to set performance targets, assess customer costs. Ahmad (2017) uses Costing System, Budgeting system, Performance Measurement System, Decision Support System, Strategic Management Accounting. Wijewardena et al (2004) uses the use of budget and variance. Chand and Ambardar use (2013) Costing System, Budgeting System, Performance evaluation, information and decision making, strategic analysis. Chiarini uses (2012) activity-based costing.

The following are indicators this study con­sidered appropriate is considered able to describe the use of management accounting in micro, small, and medium enterprises.

1) Calculation of product cost

2) Calculation of product profits

3) The calculation of customer profit

4) Preparing a sales plan

5) Production cost plan

6) Making operational cost plan

7) Creating a profit plan

8) Making cash usage plans

9) Making cash usage plans

10) Evaluate expenses

11) Compare sales results with sales plans

12) Compare production costs with production cost plans

13) Compare profit with profit plan

14) Calculate breakeven point

15) Compare the selling price with competitors

16) Compare product costs with competitors

5 DATA AND ANALYSIS

The number of returned questionnaires was 30. The results reveal that the maximum annual sales of the respondents were three hundred million rupiah, and hence they can be categorized into micro enterprises. As for the number of employ­ees, 22 respondents who had 1-5 employees, seven respondents 6-19 employees, and one respondent had 20 employees. Therefore, based on the classification according to the number of employees, there were 22 micro enterprises, seven small enterprises, and one medium enter­prise. Based on the type of business, there were 16 respondents doing the manufacturing busi­nesses, six respondents doing trading businesses, and eight respondents doing service businesses.

All of these respondents used management accounting. Respondents with the manufacturing busi­ness use more management accounting techniques than respondents with the trading and service busi­nesses. Respondents with the of manufacturing busi­ness used 10 management accounting techniques on average (65% of the total 16 management accounting techniques), respondents with the service businesses used 9 management accounting techniques (63% of the total 14 management accounting techniques), and respondents with trading businesses used 7 manage­ment accounting techniques (49% of the 14 manage­ment accounting techniques). These findings seem to confirm previous studies on small and medium enter­prises in Indonesia.

Table 2. The use of management accounting based on kind of business.

The most commonly used management account­ing technique were calculation of product costs (80%), comparing the selling price with competitors (77%) and profit calculation (73%). And the most rarely used management accounting technique is comparing actual and target profit (40%), comparing actual production costs and production cost plans (44%) and making operational costing plans (50%). Most respondents seem to use the cost accounting technique (calculating product cost, calculating profit) and not to maximize the use of management accounting. This is in agreement with findings of studies on SMEs conducted outside Indonesia that SMEs usually use simple management accounting methods.

Table 3. Management Accounting Techniques used by respondent.

6 VALIDITY AND RELIABILITY TEST

The item validity test was performed using Pearson Product Moment, with a significance level of 5%. The results revealed that all the questionnaire items were valid

Table 4. Result of validity test.

Reliability test is done using the split half method. The results showed that the questionnaire was highly reliable.

7 CONCLUSION

Micro and small enterprises in Bandung and its sur­rounding areas were found to have implemented man­agement accounting. The most commonly used management accounting techniques were calculating product cost, calculating profit, and comparing selling price with competitors. The most rarely used tech­niques were comparing actual profit with pro fit plans, comparing actual production costs and production cost plans. Most respondents used simple manage­ment accounting techniques such as cost accounting, as stated by Horngren, cannot help organizations with the decision-making and long-term budgeting pro­cesses. The results of this study cannot be generalized to describe the condition of management accounting application in small and medium micro enterprise in Indonesia or in Bandung and surrounding areas. more in-depth research is needed with larger numbers of respondents.

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