ABSTRACT
This
research work was undertaken to assess the concept and application of
marginal costing techniques in management decision making reference to Nestle
Food Plc. This work was intended to achieve the following
objectives: Showing the importance of marginal costing as a tool for
planning and short term decision making and to ascertaining the format to be
used on presenting marginal costing information by management accountants
to the management. Relevant data were collected from both primary and secondary
sources. Questionnaire was the main primary data collected instrument employed
while data from various relevant publications constituted the sources of
secondary data. Upon the analysis of data the (SPSS) along with percentage mean
item was used to analyze the questionnaires while ANOVA was used to test the
hypothesis. The study established that the marginal costing technique is the
key aspects of the Accountant’s job. The management Accountant ascertain
whether the technique contributes to high quality decision making which will
help him in reporting on magical casting techniques to Nigerian Nestle Food
Plc, and the extent to which reliance can be placed on the technique. The
overall objective of any organization is to maximize profit and hence increase
in wealth of its shareholders. Based on the finding and conclusion arrived, it
recommend that practicing management accountant should identify relevant cost
and provide information to management on the effect of costs and revenues of
charges in volume of output in the short run and Fixed cost should not be
absorbed into product cost along with variable cost rather they should be treat
as period cost which are simply charged to profit with fixed selling and
administrative cost during that period by the management.
CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
One
of the most important things in life of a business is decision making. Decision
making is an all pervasive activity taking place at every level in the
organization, covering both the short and long term. It is concerned with the
future and involves a choice between alternatives. The decision making of a
business is centered upon the information possessed by the decision
maker.
However, plans are activated by decisions which require some of financial or
qualitative analysis in order to make a rational choice. It is because of this
that the practicing management Accountant is heavily engaged in producing
relevant information for decision making purpose. The overall objective of a
business enterprise is to make profit and as such, the decision on which method
of reporting profit to be used at any given time is a very crucial management
decision.
In
traditional costing, there is a very crucial and two basic method of reporting
profits. The emphasis in this research will, however, be on the importance of
marginal costing techniques in the decision making process. These are:
a. Absorption
costing/ full costing
b. Marginal
costing period costing/direct costing
The
practice of charging all costs both variable and fixed to operations, products
or processes is termed as absorption costing.
The
practice of charging all direct costs to operations, processes or products and
leaving all indirect costs to be written off against profits in the period in
which they arise is termed as direct costing. The technique differs from
marginal costing because some fixed costs can be considered as direct costs in
appropriate circumstances.
According
to Browning, 2OOO) Marginal costing is a technique of costing in which
allocation of expenditure to production is restricted to those expenses which
arise as a result of production, e.g., materials, labor, direct expenses and
variable overheads. Fixed overheads are excluded in cases where production
varies because it may give misleading results. The technique is useful in
manufacturing industries with varying levels of output. The features which
distinguish marginal costing from absorption costing are as follows.
a. In
absorption costing, items of stock are coasted to include a ‘fair share’ of
fixed production overhead, whereas in marginal costing, stocks are valued at
variable production cost only. The value of closing stock will be higher in
absorption costing than in marginal costing.
b. As
a consequence of carrying forward an element of fixed production overheads in
closing stock values, the cost of sales used to determine profit in absorption
costing will:
i. Include
some fixed production overhead costs incurred in a previous period but carried forward
into opening stock values of the current period;
ii. Exclude
some fixed production overhead costs incurred in the current period by
including them in closing stock values.
In contrast marginal costing charges the actual fixed costs of a period in full
into the profit and loss account of the period. (Marginal costing is therefore
sometimes known as period costing.)
c. In
absorption costing, ‘actual’ fully absorbed unit costs are reduced by producing
in greater quantities, whereas in marginal costing, unit variable costs are
unaffected by the volume of production (that is, provided that variable costs
per unit remain unaltered at the changed level of production activity). Profit
per unit in any period can be affected by the actual volume of production in
absorption costing; this is not the case in marginal costing.
d. In
marginal costing, the identification of variable costs and of contribution
enables management to use cost information more easily for decision-making
purposes (such as in budget decision making). It is easy to decide by how
much
contribution (and therefore profit) will be affected by changes in sales
volume. (Profit would be unaffected by changes in production volume).
1.2 PURPOSE OF STUDY
The
purpose of this research work is to evaluate and critically examine marginal
costing technique as an important tool for making managerial decisions. The
objectives will include;
i. Showing
the importance of marginal costing as a tool for planning and short term
decision making.
ii. Ascertaining
the format to be used on presenting marginal costing information by management
Accountants to the management.
iii. Evaluating
the extent to which marginal costing can be used for pricing method.
iv. Examining
whether marginal costing has helped the management to achieve high
profitability level.
v. Ascertaining
the relevant costs to be used in marginal costing computation
1.3
RESEARCH QUESTIONS
1. How
effectively preferred is marginal costing techniques to absorption costing
techniques in an organization
2. To
what extent has marginal costing techniques contributed to decision making in
an organization?
3. Does
strict adherence to marginal costing technique enhance profitability level and
growth of an organization?
4. Does
marginal costing techniques serves as a tool for planning and short term
decisions?
1.4
STATEMENT OF HYPOTHESIS
The
following hypotheses are considered as the basis for the questions set for this
study.
Ho:
Marginal costing technique is not the best technique for decision making
compared to Absorption costing techniques
Hi:
Marginal costing technique is the best technique for decision making compared
to Absorption costing techniques
Ho:
Strict adherence to marginal costing technique does not enhance profitability
level and growth of an organization compared to strict adherence to Absorption
costing technique
Hi:
Strict adherence to marginal costing technique enhance profitability level and
growth of an organization compared to strict adherence to Absorption costing
techniques
Ho: Marginal costing techniques does not serve as a tool
for planning and short term decisions compared to absorption costing
techniques.
Hi:
Marginal costing techniques serves as a tool for planning and short term
decisions compared to absorption costing techniques.
1.5
SIGNIFICANCE OF STUDY
The
study is expected to be of tremendous help to students and managers in
production sector of the economy. At the end of the study, it would be clearly
understood and appreciated that marginal costing is a useful technique if used
with care and adopted to meet the diverse conditions which apply in a real-life
environment.
The accounting terms and management, after this research work will now see to
the fact that a good system of marginal costing techniques is necessary. This
will help to reduce the work done by management and make job less complex and
cumbersome.
This study will advance the use of n costing technique as a good system of
marginal costing technique is necessary tool to be used on making decision from
the bondage of financial troubles woes. At the end of the study would be
appreciated, how and why marginal costing can be an important and necessary aid
to decision making.
In
conclusion, the research study will be useful to Auditors, management of
companies, research institutions, professional studies and general public.
1.6
ORGANIZATION OF THE STUDY
This
research work will be five (5) chapters for easy comprehension and proper
organization. Chapter one will consist of the introduction, statement of
problem, research questions, research hypothesis, purpose, scope and limitation
of the study, significance of the study, organization, definition of terms of
study. Basically, it gives an insight into what the project work is all about.
Chapter two reviews relevant literature and the theoretical frame work on the
subject matter, and chapter three states the methodology in which the research
work is based on. Chapter four states the data analysis and interpretations and
highlights the view of respondent on the subject matter. Chapter five state the
summary, conclusion and recommendations of the research topic and with
references.
1.7
LIMITATION AND SCOPE OF STUDY
This
study could have been extended to cover as many companies in order to allow for
more representations but due to time and financial constraints this study will
be limited to the activities for Nestle Food Plc. The scope of this study
will
focus on the concept and application of marginal costing technique in Nestle
Food Plc from 2001—2005 years of their financial statement.
1.8
DEFINITION OF TERMS
Marginal
Costing: This is a decision-making technique used to determine
the effect of cost on changes in the volume of time and output in a multi
product firm especially in the short run. It treats direct costs and variable
factory over head as product cot while treating all the fixed overheads as
period cost.
Absorption Costing: This is technique which absorbs fixed overhead into period
cost through the use of a pre-determine overhead absorption rate which is Get
annually after budgeted overhead are allocated to cost centres.
Decision
Making: This is the process of selecting among alternatives
coursed of action. It is the cost stage of planning process.
Management Accounting: This is deflie as the application
of professional knowledge and skill in the preparation of accounting
information in order to as management in formulation of policies and in
planning and control
Cost: This
is the resource sacrificed or foregone to achieve a specific objective. It is
usually measured as the monetary amount that must be paid to acquire goods and
services.
Direct
Costs: Are related to the particular cost object arid can be
traced to it in an economically feasible way.
Indirect Costs: Can
be described as the cost incurred for a period which certain output and
turnover limits, tend to be unaffected by fluctuations in the levels of
activity.
Variables
Costs: Items of which tends to vary in direct proportion to
changes in the volume of output of the cost center to which they relate.
Overheads:
Refer to any cost which is not directly attributable to a cost unit. In
other overhead Is the total of Indirect material cost, indirect
labour cost and indirect expenses.
Break Even Analysis: This is the term given to the
study of interrelationship among costs. Volume and profits at variables levels
of activity. At break even point, neither profit nor loss is made.
Contribution: This is the difference between the sales and costs of product in
a given period of time.