11005_The usage of management accounting tools by small and medium enterprises in cape metropole, South Africa

THE USAGE OF MANAGEMENT ACCOUNTING TOOLS BY SMALL AND MEDIUM
ENTERPRISES IN CAPE METROPOLE, SOUTH AFRICA

by
CHIDINMA CAROLINE MADUEKWE
Thesis submitted in fulfilment of the requirement for the degree
MAGISTER TECHNOLOGIAE: Cost and Management Accounting
In the Faculty of Business and Management Sciences
At the Cape Peninsula University of Technology, Cape Town
Supervisor: Dr Peter Kamala
Co-supervisor: Dr Michael Twum-Darko
Cape Town
October 2015
CPUT copyright information
This dissertation/thesis may not be published either in part (in scholarly, scientific or
technical journals), or as a whole (as a monograph), unless permission has been
obtained from the University.

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DECLARATION

I, Chidinma Caroline Maduekwe, declare that the contents of this thesis represent my own
unaided work and that the thesis has not previously been submitted for academic examination
towards any qualification. Furthermore, it represents my own opinions and not necessarily those
of the Cape Peninsula University of Technology.

Chidinma Caroline Maduekwe October, 2015

Signed

Date

ii

ABSTRACT

This study sought to determine the extent to which Small and Medium Enterprises (SMEs) in
the Cape Metropole use Management Accounting Tools (MATs), namely budgeting tools,
Performance Measurement Tools (PMTs) and pricing tools, which are considered critical for
the survival of these entities. Specifically, the study aimed to determine the types of MATs used
by SMEs; the purpose for which MATs are used by SMEs; the perception of SMEs regarding
the effectiveness of these tools and the possible factors that could inhibit SMEs from using the
tools. The study was motivated by a lack of research on the usage of MATs by SMEs. Data was
collected by means of a questionnaire that comprised closed-ended questions.

The findings of the study reveal that most of the sampled SMEs used, albeit to some extent,
the three MATs that were investigated in this research. The findings also suggest that the
sampled SMEs used MATs mostly for the purposes of measuring and monitoring the
performance of their businesses. With regard to the perceived effectiveness of the MATs, the
findings revealed that the MATs investigated were perceived to be moderately effective, with
PMTs being perceived to be more effective, followed by pricing tools, then budgeting tools.
Concerning the factors that possibly inhibit SMEs in the Cape Metropole from using MATs, the
findings suggest that a lack of top management support as well as qualified personnel were the
main inhibiting factors.
This study does not only contribute significantly to the literature on the usage MATs by filling in
the gap in the literature, it also provides invaluable insights on the usage of these tools. These
insights could be used to inform future endeavours of the Government when developing
interventions meant to avert the high failure rates of these entities. The findings may also assist
SMEs to gauge and review their usage of MATs with a view to optimising the benefits derived
from these tools, as well as overcoming the factors that inhibit them from using the tools in the
first place.

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ACKNOWLEDGEMENTS
I wish to thank:
 God Almighty for the grace and strength to finish this work
 Dr Peter Kamala for his supervision and guidance throughout my studies
 Dr Michael Twum-Darko, my co-supervisor
 Dr Henrie Benedict for his guidance and encouragement
 My husband, Mr Elvis Oji, for his support throughout this journey
 All my friends and loved ones out there who encouraged me in one way or
another.

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DEDICATION
This Thesis is dedicated firstly to God Almighty, and then to my husband Mr Elvis Oji and all my loved
ones.

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TABLE OF CONTENTS
DECLARATION ………………………………………………………………………………………………………………….. i
ABSTRACT …………………………………………………………………………………………………………………………ii
ACKNOWLEDGEMENTS ……………………………………………………………………………………………………
iii
DEDICATION ……………………………………………………………………………………………………………………..
iv
CHAPTER ONE:BACKGROUND AND PROBLEM STATEMENT
……………………………………….. 1
1.1 BACKGROUND
……………………………………………………………………………………………………………. 1
1.2 Problem statement ……………………………………………………………………………………………………….. 4
1.3 Purpose Statement ………………………………………………………………………………………………………. 5
1.4 Research question; sub-questions and objectives ………………………………………………………….. 6
1.4.1 Research question …………………………………………………………………………………………………. 6
1.4.2 Sub-questions, research methods and objectives…………………………………………………….. 6
1.5 IMPORTANCE OF THE STUDY
……………………………………………………………………………………. 7
1.6 RESEARCH DESIGN …………………………………………………………………………………………………… 7
1.6.1 The empirical study ………………………………………………………………………………………………… 7
1.6.2 Sampling method …………………………………………………………………………………………………… 8
1.6.3 Data collection, analysis and interpretation ……………………………………………………………… 8
1.7 ETHICAL CONSIDERATION ………………………………………………………………………………………… 8
1.8 DELINEATION OF THE RESEARCH ……………………………………………………………………………. 9
1.9 THE SIGNIFICANCE OF THE STUDY ………………………………………………………………………….. 9
1.10 LIMITATIONS AND CONSTRAINTS……………………………………………………………………………. 9
1.11 CONTRIBUTION OF THE RESEARCH
……………………………………………………………………… 10
CHAPTER TWO:LITERATURE REVIEW …………………………………………………………………………. 11
2.1 INTRODUCTION ………………………………………………………………………………………………………… 11
2.2 DEFINITION AND DESCRIPTION OF MANAGEMENT ACCOUNTING AND MATS ……… 11
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2.2.1 Definition of Management Accounting
……………………………………………………………………. 11
2.2.2 Budgeting tools
…………………………………………………………………………………………………….. 12
2.2.3 Performance Measurement Tools (PMTs) …………………………………………………………….. 13
2.2.4 Pricing tools …………………………………………………………………………………………………………. 15
2.3 DEFINITION OF SMES AND THEIR IMPORTANCE TO THE SOUTH AFRICAN
ECONOMY
………………………………………………………………………………………………………………………. 16
2.3.1 Definition of SMEs
………………………………………………………………………………………………… 17
2.3.2 Importance of SMEs……………………………………………………………………………………………… 18
2.4 PRIOR STUDIES ON THE TYPES OF MANAGEMENT ACCOUNTING TOOLS
EMPLOYED BY SMES …………………………………………………………………………………………………….. 19
2.4.1 Budgets ……………………………………………………………………………………………………………….. 19
2.4.2 Performance Measurement Tools (PMTs) ……………………………………………………………… 23
2.4.3 Pricing Tools ………………………………………………………………………………………………………… 27
2.5 PRIOR STUDIES ON THE PURPOSE FOR WHICH MATS ARE USED ……………………….. 33
2.6 PRIOR STUDIES ON PERCEPTIONS OF SMES REGARDING THE EFFECTIVENESS
OFMATS EMPLOYED ……………………………………………………………………………………………………… 37
2.7 PRIOR STUDIES ON THE FACTORS THAT INHIBIT SMES FROM USING MATS ………. 39
2.8 GAPS IDENTIFIED IN THE REVIEW OF THE PRIOR LITERATURE …………………………… 42
2.9 SUMMARY AND CONCLUSION …………………………………………………………………………………. 43
CHAPTER THREE:RESEARCH DESIGN AND METHODOLOGY …………………………………….. 46
3.1 INTRODUCTION ………………………………………………………………………………………………………… 46
3.2 POSITIVIST RESEARCH PARADIGM ………………………………………………………………………… 47
3.3 JUSTIFICATION FOR THE QUESTIONNAIRE SURVEY METHODOLOGY …………………. 47
3.4 RESEARCH POPULATION AND SAMPLING TECHNIQUE
…………………………………………. 48
3.4.1 Research population …………………………………………………………………………………………….. 48
3.4.2 Sampling technique
………………………………………………………………………………………………. 48
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3.5 DESIGN OF THE QUESTIONNAIRE
…………………………………………………………………………… 48
3.5.1 General description of the questionnaire design …………………………………………………….. 48
3.5.2 Description of the specific sections of the questionnaire …………………………………………. 49
3.5.2.1 Section One: Management accounting tools ……………………………………………………. 49
3.5.2.2 Section Two: Management accounting reports ………………………………………………… 52
3.5.2.3 Section Three: Perception of the effectiveness of management accounting ………. 52
tools used …………………………………………………………………………………………………………………. 52
3.5.2.4 Section Four: Factors that inhibit preparation of management accounting
reports ………………………………………………………………………………………………………………………. 52
3.5.2.5 Section Five: Respondent and business profile ……………………………………………….. 53
3.6 PILOT STUDY ……………………………………………………………………………………………………………. 53
3.7 DATA COLLECTION PROCESS
…………………………………………………………………………………. 54
3.8 DESCRIPTION OF DATA ANALYSIS METHODS ADOPTED ………………………………………. 54
3.8.1 Descriptive statistics
……………………………………………………………………………………………… 55
3.9 MEASURES TO ENSURE RELIABILITY AND VALIDITY …………………………………………….. 55
3.9.1 Reliability of the research instrument …………………………………………………………………….. 55
3.9.2 Validity of the research instrument
…………………………………………………………………………. 57
3.9.2.1 Internal validity …………………………………………………………………………………………………. 57
3.9.2.2 Construct validity ………………………………………………………………………………………………. 57
3.9.2.3 Content validity
…………………………………………………………………………………………………. 57
3.9.2.4 External validity
…………………………………………………………………………………………………. 58
3.10 LIMITATIONS OF THE QUESTIONNAIRE SURVEY………………………………………………….. 58
3.11 Ethical considerations ……………………………………………………………………………………………….. 60
3.11.1 Informed Consent
……………………………………………………………………………………………….. 60
3.11.2 Confidentiality and anonymity ……………………………………………………………………………… 60
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3.12 SUMMARY……………………………………………………………………………………………………………….. 60
CHAPTER FOUR:ANALYSIS AND DISCUSSION OF RESULTS ……………………………………… 62
4.1 INTRODUCTION ………………………………………………………………………………………………………… 62
4.2 RESTATEMENT OF RESEARCH OBJECTIVES …………………………………………………………. 62
4.3 RESPONSE RATE
……………………………………………………………………………………………………… 63
4.4 RESPONDENTS’ PERSONAL AND THEIR BUSINESSES’ PROFILE ………………………….. 63
4.4.1 Respondents’ position in the business …………………………………………………………………… 64
4.4.2 Respondents’ years of experience ………………………………………………………………………… 65
4.4.3 Respondents’highest level of education
…………………………………………………………………. 65
4.4.4 Whether respondents’ highest level of education was accounting related ……………….. 66
4.4.5 Respondents’ business industry ……………………………………………………………………………. 67
4.4.6 Respondents’ business number of employees ……………………………………………………….. 68
4.5 TYPES OF MATs USED BY SMES …………………………………………………………………………….. 69
4.5.1 Usage of budgets by SMEs …………………………………………………………………………………… 69
4.5.2 Frequency of usage of various types of budgets by SMEs ……………………………………… 70
4.5.3 Frequency of usage of various methods of budgeting by SMEs
………………………………. 72
4.5.4 Usage of PMTs by SMEs ……………………………………………………………………………………… 73
4.5.5 Frequency of usage of different types of performance measurement tools
………………. 74
by SMEs ………………………………………………………………………………………………………………………. 74
4.5.6 Usage of pricing tools by SMEs …………………………………………………………………………….. 77
4.5.7 Frequency of usage of various types of pricing tools by SMEs………………………………… 77
4.6 PURPOSE FOR WHICH MATS ARE USED BY SMES ………………………………………………… 80
4.6.1 Preparation of budgetary, performance measurement and pricing reports ………………. 80
4.6.2
Frequency of usage of management accounting reports for various purposes
…. 81
4.7 PERCEVED EFFECTIVENESS OF THE MATs USED BY SMEs …………………………………. 84
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4.8 FACTORS THAT INHIBIT THE USAGE OF MATs
……………………………………………………….. 85
4.8.1 Factors that inhibit the respondents from using budgetary tools ……………………………… 87
4.8.2 Factors that inhibit the respondents from using PMTs…………………………………………….. 87
4.8.3 Factors that inhibit the respondents from using of pricing tools ……………………………….. 88
4.9 SUMMARY OF THE CHAPTER ………………………………………………………………………………….. 88
CHAPTER FIVE:SUMMARY AND CONCLUSIONS ………………………………………………………….. 91
5.1 INTRODUCTION ………………………………………………………………………………………………………… 91
5.2 CHAPTER 1 – RESEARCH PROBLEM AND OBJECTIVES …………………………………………. 91
5.3 CHAPTER2 ̶ SUMMARY AND CONCLUSION OF REVIEW OF PRIOR STUDIES ON THE
USE OF MATS
…………………………………………………………………………………………………………………. 92
5.4 CHAPTER 3- SUMMARY AND CONCLUSION OFRESEARCH DESIGN AND
METHODOLOGY …………………………………………………………………………………………………………….. 93
5.5 CHAPTER 4 ̶ SUMMARY OF ANALYSIS AND DISCUSSION OF RESULTS ………………… 93
5.5.1 Population, response rate, respondents’ and businesses’ profiles
…………………………… 94
5.5.2 Types of MATs used by SMEs
………………………………………………………………………………. 94
5.5.2.1 Budgets and budgeting methods used by SMEs ……………………………………………… 94
5.5.2.2 Performance measurement tools
…………………………………………………………………….. 95
5.5.2.3 Pricing tools …………………………………………………………………………………………………… 95
5.5.3 Purpose for which MATs are used by SMEs ………………………………………………………….. 96
5.5.4 Perceived effectiveness of the MATs currently used by SMEs
………………………………… 96
5.5.5 Factors that inhibit SMEs from using MATs
……………………………………………………………. 96
5.6 CONTRIBUTION AND SIGNIFICANCE OF THE STUDY
……………………………………………… 96
5.6.1 Contribution of the study
……………………………………………………………………………………….. 96
5.6.2 Significance of the study
……………………………………………………………………………………….. 97
5.7 LIMITATIONS OF THE STUDY …………………………………………………………………………………… 98
5.8 SUGGESTIONS FOR FURTHER STUDIES ………………………………………………………………… 99
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BIBLIOGRAPHY …………………………………………………………………………………………………………….. 101

LIST OF FIGURES
Figure 4.1: Respondents’ position in the business

64
Figure 4.2: Respondents’ years of experience
65
Figure 4.3: Respondents’ highest level of education

66
Figure 4.4: Respondents accounting related qualifications

67
Figure 4.5: Respondents’ business industry

68
Figure 4.6: Respondents’ number of employees
69
Figure 4.7: Respondents’ usage of budgets
70
Figure 4.8: Usage of performance measurement tools
73
Figure 4.9: Usage of pricing tools/strategies

77
Figure 4.10: Preparation of management accounting reports

81

LIST OF TABLES
Table 1.1: Research sub question, research method, Research objectives

6
Table 2.1: Classification of small businesses in South Africa

17
Table 2.2: Classification of SMEs for the purpose of this study

18
Table 3.1: Cronbach Alpha

56
Table 4.1 Response rate

63
Table 4.2: How often various types of budgets were used by SMEs

71
Table 4.3: How often various types of budgeting methods were used by SMEs

72
Table 4.4: How often various performance measurement tools were used by SMEs
75
Table 4.5: How often various pricing tools/strategies were used by SMEs

78
Table 4.6: How often management accounting reports were used for various
purposes by SMEs

82
Table 4.7: Perceived effectiveness of MATs usedby SMEs

84
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Table 4.8: Factors that inhibit the usage of MATs

86

APPENDICES:
Appendix A: Consent Letter

110
Appendix B: Questionnaire

111
Appendix C: Cronbach Alpha Coefficient Test

118
Appendix D: Frequency Distribution

132

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GLOSSARY
Abbreviation

Definitions/Explanations
CIMA
Chartered Institute of Management Accountants
CSM
Cranfield School of Management
OECD
Organisation for Economic Co-operation and Development
FMCG
Fast Moving Consumer Goods
BSC
Balanced Score Card
MATs
Management Accounting Tools
MAP
Management Accounting Practices
PMTs
Performance Measurement Tools
SMEs
Small and Medium Enterprises
ZBB
Zero Based Budgeting

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CHAPTER ONE
BACKGROUND AND PROBLEM STATEMENT
1.1 BACKGROUND
Given the high unemployment rate in South Africa, Small and Medium Enterprises (SMEs)
have become of paramount importance because they create employment opportunities and
impart entrepreneurial skills, both of which are critical for the alleviation of poverty and are key
drivers of economic growth (SEDA, 2012; Fatoki, 2012). In South Africa, SMEs account for
about 70% of the labour force in the private sector as well as for an estimated 80% of the newly
created jobs (Ramukumba, 2014; Fatoki & David, 2010; Tuner, Varghese & Walker, 2008:15).

Notwithstanding the importance of SMEs in South Africa, research evidence suggests that
most of these entities do not survive for more than three years (Bruwer, 2010: 2). In fact, 80%
of all SMEs in South Africa fail within the first five years of operation, a failure rate considered
to be one of the highest in the world (Phenya, 2011:1; Mbogo, 2011:110). To avert the high
failure rate of SMEs, the Government has initiated various support measures aimed at
developing and promoting SMEs (SBP Alert, 2013; Falkena, Abedian, Blottnitz, Coovadia,
Davel, Madungandaba, Masilela & Rees, 2001:13). Key among the measures include the
creation of the National Skills Authority, which introduced the National Skills Development
Strategy meant to stimulate and support skills development, given that vital skills were
perceived to be lacking among SMEs (SEDA, 2012; South Africa, 1998).
Despite the introduction of the National Skills Development Strategy, prior research has
indicated that most decision-makers of SMEs lack critical business skills, particularly the
management accounting skills required for effective management of their businesses
(Tlhomola, 2010; Nandan, 2010). This is because most of the decision-makers venture into
business out of necessity rather than opportunity, given the lack of job opportunities in South
Africa (Turner et. al., 2008:17). As a result, most SMEs are managed by people who are
functionally illiterate, and/or who typically lack management accounting skills (Shaku, 2011:4).

Without management accounting skills, most decision-makers of SMEs in South Africa largely
rely on their gut feeling, rules of thumb, and personal whims, as well as other trial and error
techniques, which are inappropriate especially in the wake of intense competition (Gape,

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2007). Given the crude techniques employed by SMEs’ decision-makers, it is not surprising
that these entities continue to fail at an alarming rate. The persistent failure of SMEs suggests
that the National Skills Development Strategy introduced by the Government is either
ineffective or inappropriate and that more research is needed to inform the strategy (Rajaram,
2008:10).

Unlike the crude techniques employed by most decision-makers of SMEs, Management
Accounting Tools (MATs) provide tools for planning (budgeting tools), monitoring and
evaluating the performance of businesses (PMTs) (Proctor, 2009). In addition, MATs provide
tools that are useful for strategic decisions such as pricing decisions (pricing tools), to mention
but a few (Latif & Alnawaiseh, 2013).

Although management accounting provides many useful tools for large and small businesses
alike, only budgeting tools, PMTs and pricing tools are the focus of this study because they are
extensively used by the large companies but also are largely ignored by SMEs (Nandan, 2010;
CIMA, 2009). Besides, it is not practically feasible to investigate all the MATs that could
possibly be used by SMEs in a single study. The next section elaborates on the benefits of the
three MATs that are the focus of this study.

Budgets provide future-oriented information that facilitates control of business performance by
highlighting areas in which actual performance deviates from the budgeted performance, so
that an appropriate corrective action can be taken (Anohene, 2011). In addition, these tools
facilitate the coordination and alignment of different departments within a business towards
common objectives (John & Ngoasong, 2008). Furthermore, budgets provide a useful yardstick
for evaluating employee performance and for rewarding good results to motivate employees.
Most importantly, budgets are essential in writing a business plan (Abogun & Fagbemi, 2012).
This is particularly important for SMEs because these entities, unlike their larger counterparts,
need to present convincing business plans when raising capital but typically have little or no
success track record and are thus perceived to be high-risk ventures by the providers of
capital. Without a successful track record, the decision-makers of SMEs are required to
demonstrate convincingly that their business has a clear strategy and a realistic plan to make
profit (Abogun & Fagbemi, 2012). A coherent and realistic budget is therefore an essential
component of an SME’s business plan for raising capital (Olatunji, 2013).

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PMTs, such as the Balanced Score Card (BSC), provide businesses with a holistic view of their
operations and dynamic information that enables them to establish their current performance
and to continuously monitor their progress over time (Salem, Hasnan & Osman, 2012). In
addition, these tools expose a business’s weaknesses, as well as opportunities for
improvement, which are then used to review and clarify objectives and priorities. As a result, a
business is able to understand its internal and external contexts, which can compel it to adopt
better strategies for improving its management processes as well as its business performance
in general. Besides, balanced and multi-dimension PMTs can capture non-financial factors
such as customer loyalty, employee satisfaction, internal processes and innovation, which are
the real drivers of value within modern businesses that make their future performance
predictable (Farooq & Hussain, 2011).

Pricing tools provide businesses with vital information on the appropriate pricing strategy to
employ to not only cover their costs but also to compete effectively and generate revenue for
growth (Singh, 2013). Specifically, sound pricing tools are vital for businesses to ensure
viability (prices that cover costs), and affordability for their customers (to ensure adequate
demand), as well as competitiveness when facing fierce competition (Singh, 2013).

Notwithstanding the afore-mentioned potential benefits of MATs to all types of businesses, only
a few studies have been conducted to determine the extent to which SMEs employ these tools
(Nandan, 2010:65). Some prior studies have indicated that many SMEs no not prepare
budgets, and those that do, neither continuously update the budgets nor monitor their progress
against the budgets (CIMA, 2009).

By contrast, other studies have revealed a high uptake of budgets by SMEs (Mahfar & Omar,
2004; Uyar, 2010; Ahmad, 2012). However, these studies have indicated a widespread
dissatisfaction among SMEs with the budgets once adopted (Uyar 2010; Ahmad, 2012).
Specifically, budgets have been criticised as an impediment to optimal allocation of resources
as they are perceived to encourage myopic decision-making and other dysfunctional budgeting
tactics. In addition, the budgeting process has been perceived to be too time consuming, too
costly, too distorted by tactics employed and too focused on cost control (Abogun & Fagbemi,
2011). More importantly, the process has been perceived to be divorced from the overall
strategic direction of businesses. The foregoing criticisms raise questions regarding the

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effectiveness of the budgets employed by SMEs and whether the budgets serve their intended
purpose (Alleyne & Marshall, 2011).

Yet other prior studies have documented a high uptake of financial performance measures by
SMEs (CIMA, 2009). However, the uptake of non-financial performance measures, except the
ones related to customers, has remained dismally low among these entities (Ahmad, 2012).
Among reasons provided for the low uptake of non-financial performance measures is the
inadequacy of the information systems of SMEs in providing these measures, and the
complexity of the performance measures which render them incomprehensible and unusable,
as well as the general perception that these measures are not as important as the financial
ones (Ahmad, 2012; Mabesele, 2009).

Some prior studies have also revealed that most SMEs do not optimise on their prices (Gape
2007; Carson, Gilmore, Cummins, O’Donnell & Grant, 1998:74). This is because these entities
lack a technical approach to pricing and are more likely to take pricing decisions in a
haphazard or chaotic way as opposed to an orderly, sequential and structured approach
(Gape, 2007). Accordingly, SMEs’ decision-makers over-rely on cost-plus pricing tools but are
unable to accurately determine the unit cost of their products in the first place (Indounas,
2006). As a result, they tend to under-price their products and are unable to make a profit, a
situation which forces some of these entities to close down. For those that survive, they fall into
a trap of pricing at whatever price buyers are willing to pay, or at a price dictated by
competitors rather than at a price that reflects the true value of the product (Singh, 2013).
Worse still, most of the decision- makers of SMEs tend to rely on haphazard pricing techniques
such as their gut-feeling and other thumb-sucking techniques that eventually lead to poor
pricing decisions (Gape, 2007).

1.2 Problem statement
The problem to be investigated in this research study is that SMEs particularly those in FMCGs
sector in South Africa are perceived to be failing partly due to a lack of or ineffective use of
MATs such as budgets, PMTs and pricing tools. Given that most decision-makers of SMEs in
South Africa lack conventional management accounting skills, they largely rely on
unconventional techniques such as their gut-feeling, rules of thumb, personal whims, as well as

5

trial-and-error techniques when making their budgeting, performance measurement and pricing
decisions, which are inappropriate in the modern competitive business environment. As a
result, most of the decisions made by SMEs tend to be haphazard, chaotic and ineffective as
they are not informed by a well-thought-out, orderly, sequential and structured approach of
MATs.
Many reasons have been provided to explain the high failure rate of SMEs. Notable among
these reasons is their inability to make use of essential business management tools such as
budgets, PMTs and pricing tools (Ahmad, 2012:18). Many SMEs fail to prepare budgets; those
that do fail to continuously update their budgets and monitor their progress against the
budgets, or are dissatisfied by the ineffectiveness of the budgets developed or the budgeting
process (Ahmad, 2012:18). In addition, most SMEs focus only on financial performance
measures but ignore the more strategic non-financial measures. Furthermore, some SMEs do
employ inappropriate pricing techniques that do not secure optimum prices for their products
(Hudson, Smart & Bourne, 2001).
Despite the importance of SMEs in South Africa and their relatively high failure rate, little
research has been conducted in the country to determine the extent to which these entities
employ budgets, PMTs and pricing tools (Nandan, 2010). Given the many potential benefits
that SMEs can derive from using these tools, it is imperative that their usage of these tools be
investigated.
1.3 Purpose Statement
The main purpose of this study is to determine the extent to which decision-makers of SMEs in
the Fast Moving Consumer Goods (FMCG) sector in the Cape Metropole employ MATs to
manage their businesses. Specifically, this study will determine the extent to which decision-
makers of SMEs employ budgets, PMTs and pricing tools, as these tools are considered to be
critical for SMEs’ survival (CIMA, 2009). The FMCG sector was selected because it is one of
the sectors in South Africa with the highest number of SMEs (Steenkamp, 2010:26).

6

1.4 Research question; sub-questions and objectives
1.4.1 Research question:
The research question for this study is:
To what extent do the decision-makers of Small and Medium Enterprises in the Fast Moving
Consumer Goods sector in the Cape Metropole employ Management Accounting Tools for
decision-making in their businesses?
1.4.2 Sub-questions, research methods and objectives:
The research sub-questions and objectives together with the method of investigating each
objective are presented schematically as follows:
Table 1.1: Research sub-objectives, research Methods and research Objectives
Research sub-questions
Research Methods
Research Objectives
What types of MATs are employed
by SMEs?
Questionnaire underpinned by
descriptive analysis and
literature review.
To determine the types of MATs
employed by SMEs.
For what purposes are MATs used
by SMEs?
Questionnaire underpinned by
descriptive analysis and
literature review.
To determine the purposes for
which MATs are used by SMEs.
What are the perceptions of
decision-makers of SMEs
regarding the effectiveness of the
MATs currently employed by these
entities?
Questionnaire underpinned by
descriptive analysis and
literature review.
To determine the perceptions of
decision-makers of SMEs
regarding the effectiveness of
MATs currently employed by
these entities.
What factors inhibit SMEs from
using MATs?
Questionnaire underpinned by
descriptive analysis and
literature review.
To determine the factors that
inhibit SMEs from using MATs.

7

1.5 IMPORTANCE OF THE STUDY
Notwithstanding the high failure rate of SMEs in South Africa and the growing research
evidence from other countries that partly attributes the failure rate of SMEs to a lack of or
ineffective use of MATs (Mbogo, 2011), only a limited number of studies have been conducted
on the usage of MATs by SMEs in South Africa. As a result, little is understood about the
extent to which SMEs in the country use these tools to manage their businesses. It is thus
important that this gap be filled, if only to avert the high failure rate of SMEs in the country.
Usage of MATs can benefit SMEs in the various ways highlighted above (See Section 1.2).
Without research such as this one, it would be impossible for institutions such as the
Government to gauge how well SMEs are using these tools which are critical for the survival of
these entities. A study such as this one is therefore important to inform the Government’s
interventions that are meant to ensure that SMEs do not only survive, but that they also thrive.

This study exposes the decision-makers of SMEs to the benefits of MATs adopted by their
peers and even larger competitors. This should enable them to benchmark their own
businesses’ usage of these tools against the best practices and possibly adopt the best
practices or improve on their current usage of these tools. Without a study such as this one, the
decision-makers can continue using their own unconventional techniques for managing their
businesses to their peril.

1.6 RESEARCH DESIGN
1.6.1 The empirical study
Given that the main purpose of this study is to determine the extent to which the decision-
makers of SMEs in the FMCG sector employ MATs, a positivist approach was employed. This
approach was selected because it is based on the assumption that the reality is objectively
given and is measurable using methods that are independent of the researcher and the
research instruments. Therefore, knowledge resulting from positivist research is deemed
objective and quantifiable, which falls under the ambit of quantitative research (Mabesele,
2009:5-6; Ahmad, 2012: 23; Bruwer, 2010:4).

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1.6.2 Sampling method
Purposive sampling technique was employed to select 100 SMEs in the Cape Metropole. This
technique was deemed suitable for this study because it involves a sample being drawn from
that part of the population which contains the characteristics or the attributes of the population
that serve the purpose of a study (De Vos, Strydom, Fouche & Delport, 2011:232). Besides,
the technique was used because it focuses on a small sample and has been widely used by
other researchers (Ndwiga, 2011; Bruwer, 2010:30).
1.6.3 Data collection, analysis and interpretation
Bearing in mind that the researcher seeks to gather objective information relating to the usage
of MATs by SMEs in the Cape Metropole, primary data was collected from owners, managers
or accountants of the selected SMEs by means of a self-administered, closed-ended
questionnaire. This survey instrument is pragmatic when a large volume of information is to be
collected from a large number of respondents in a short period of time and at a relatively low
cost (Brynard & Hanekom, 2006). Besides, questionnaire surveys are useful for collecting data
from a sample in order to conduct statistical analyses and generalise results to a population
(Brynard & Hanekom, 2006). The quantitative data collected was analysed and interpreted
using descriptive statistics to enhance the validity of the findings.
The questionnaire was divided into five sections to ensure clarity. Section one focused on the
types of MATs employed. Section two dealt with the purpose for which MATs are used by
SMEs. Section three focused on the respondents’ perception on the effectiveness of MATs
currently employed by their businesses. Section four was designed to collect data on the
factors that could inhibit the use of MATs and finally section five was aimed at obtaining
respondents’ business profile.
1.7 ETHICAL CONSIDERATION
Bearing in mind that human participants would be involved in this study, an approval to conduct
this research was obtained from the Cape Peninsula University of Technology’s Ethics
committee before commencing data collection. The ethics committee requires that the
respondents of such a study be protected from any potential negative repercussion that may
arise as a result of participating in the research.

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1.8 DELINEATION OF THE RESEARCH
This study was limited to SMEs that employ between six and 100 employees in the FMCG
sector and that are located in the Cape Metropole. This was because the businesses with less
than five employees are less likely to adopt MATs (Armitage & Webb, 2014). Only owners,
managers, and accountants were deemed to be the decisions-makers of the SMEs. In addition,
the study only analysed the usage of three MATs, namely budgets, PMTs and pricing tools as
these are the tools that are typically employed by SMEs.
1.9 THE SIGNIFICANCE OF THE STUDY
The findings of this study are of significance to the decision-makers of SMEs as they will be
enlightened on the best practice in the usage of MATS and the types of MATs that are vital for
their businesses’ survival that have been adopted by their competitors. The decision-makers
will also be enlightened on various uses of MATs, the MATs perceived to be effective and the
factors that inhibit SMEs from using these tools. This should enable them to evaluate their own
usage of the MATs and decide whether to improve, change or continue with their current
usage. The decision-makers will also benefit from recommendations made in this study on
various ways to overcome the factors that inhibit the uptake of MATs by SMEs. The South
African Government, whose initiatives to promote SMEs are widely perceived to be ineffective,
may also draw on the findings of this research to inform its future intervention strategies,
particularly relating to the National Skills Development Strategy meant to avert the high failure
rate of these entities.

1.10 LIMITATIONS AND CONSTRAINTS
Given that only a few studies have been conducted on the usage of MATs by SMEs, this study
was informed by limited prior literature. In addition, the study only focused on SMEs from the
FMCG sector located in the Cape Metropole. Accordingly, the findings obtained may not be
applicable to all SMEs in South Africa.
Due to the busy schedule of the targeted respondents, it was difficult to get them to answer the
questionnaire and some of them were reluctant to answer some questions. To increase the
response rate, the respondents were visited severally to encourage them to participate in the
survey and to respond to all the questions in the questionnaire. Given the well-documented

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tendency of respondents to complete questionnaires in a biased manner, the respondents of
this study were encouraged to be truthful when completing the questionnaire.
One of the well-documented weaknesses of a questionnaire survey method is a low response
rate which leads to a non-response bias (De Vos, et al., 2011). This undermines the
generalisability of the results to the entire population. Apart from visiting respondents severally
and encouraging them to participate in the survey, the risk of a low response rate was
mitigated by drawing up a relatively short questionnaire comprising closed-ended questions.
Given that the researcher was in most cases asked to drop off the questionnaire without
meeting the respondents face to face, an opportunity was missed to engage with the
respondents in order to explain or clarify ambiguous terms and concepts, which could have
undermined the response rate (De Vos, et al., 2011). To mitigate this problem, the researcher
made an attempt to meet face to face with the respondents.
Considering the sensitive nature of the information elicited in this research as well as the risk
involved in disclosing it, one can justify the unwillingness of some respondents to partake in the
study (De Vos, et al., 2011). To overcome this limitation, the researcher reassured the
respondents of the confidentiality of the survey when distributing the questionnaire to them.

1.11 CONTRIBUTION OF THE RESEARCH
This study was intended to fill a gap in research on the usage of MATs by SMEs in South
Africa. Although many studies have been conducted on the usage of these tools in other
countries, little research has been conducted on the same in South Africa (Ahmad, 2012). The
few studies that investigated the usage of PMTs in South Africa did not focus on the FMCG
sector, nor did they investigate the usage of budgets or even pricing tools (Mabesele, 2009).
Hence, the findings of this research will contribute to the debate on the usage of MATs and
their application in the unique context of SMEs. The next section discusses the literature review
of prior studies on the usage of the three MATs that are the focus of this study.

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CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION
The main aim of this chapter is to review the prior literature on the usage of Management
Accounting Tools (MATs) by Small and Medium Enterprises (SMEs). By so doing, the chapter
identifies gaps in the literature with regard to the types of MATs that are used by SMEs, the
purpose for which the tools are used, the perceptions of the decision-makers of SMEs
regarding the effectiveness of the tools used, and factors that inhibit SMEs from using these
tools.
2.2 DEFINITION AND DESCRIPTION OF MANAGEMENT ACCOUNTING AND MATS
This chapter proceeds with the definition of the term management accounting as well as the
three MATs that are the subject of this study; namely budgeting tools, performance
measurement tools and pricing tools, in Section 2.2. This is followed by the definition of SMEs
and a discussion of their importance to the South African economy in Section 2.3. Section 2.4
reviews prior studies on the types of MATs employed by SMEs. This is followed by a review of
prior studies on the purpose for which MATs are used in Section 2.5. Section 2.6 reviews prior
studies on perceptions of SMEs regarding the effectiveness of the MATs employed by these
entities. The chapter then reviews the prior studies on factors that inhibit SMEs from using
MATs in Section 2.7. Section 2.8 presents the gaps identified in the review of the prior literature
as well as the research questions that have remained unanswered. The summary and
conclusion of this chapter is then provided in Section 2.9.
2.2.1 Definition of Management Accounting
According to the Institute of Management Accounting (IMA) (2008:1) management accounting
is defined as:
… a profession that involves partnering in the management decision- making, devising
planning and performance measurement systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of an
organisation’s strategy.

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On the other hand, the International Federation of Accountants (IFAC) (1989:99) defines
management accounting as:
… the process of identification, measurement, accumulation, analysis, preparation,
interpretation, and communication of information used by management to plan,
evaluate and control within an entity and to assure appropriate use of and accountability
for its resources.
The above definitions suggest that MATs are primarily used for planning, measuring
performance and controlling operations of entities, and assist the management of an entity to
formulate and implement strategies. For entities to plan, measure, control their performance
and implement their strategies, they employ MATs such as budgeting tools, PMTs and pricing
tools which are defined below.
2.2.2 Budgeting tools
A budget is a quantitative expression of a plan for a defined period of time meant to attain a
certain objective (Anohene, 2011:24: Wildavsky, 2002:18). It expresses strategic and operating
plans of business units, organisations, activities or events in measurable terms. Budgets
provide a method of allocating scarce resources within an organisation (Drury, 2004). They
also enable the management of an organisation to monitor and control operations by setting
standards expected and addressing any deviations from the set standards (Hanson & Mowen,
2006; Olatunji, 2013:1131). In addition, budgets are useful in promoting forward thinking by
managers, communicating an entity’s goals to employees and evaluating their performance
(Voigt, 2010). Accordingly, budgets can be used to motivate employees to achieve set targets,
co-ordinate different departments within an entity and align them towards shared objectives.
The types of budgets employed in an entity depend on the nature of business it is engaged in
(Badu, 2011:17). For instance, production budgets which are relevant to manufacturing
businesses are not relevant to retail businesses. However, there are certain types of budgets
that are universally relevant to all types of businesses irrespective of the nature of their
activities (Hanson & Mowen, 2006). For instance operating budgets, which deal with recurrent
income and expenses of a business such as sales budgets, cash budgets, marketing budgets,
and personnel budgets are universally relevant, and are briefly described below.
Sales budgets are detailed schedules of expected sales in monetary terms and units for the
budget period (usually one year), whereas cash budgets are projected short-term cash inflows