CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Every organization is in business either to make profit
or to cover its cost of production or to render services. Profit is the excess
of revenue over cost or expenditure. Company executives have control over
the selling price and therefore have focus attention on cost. The
executive is presented with periodic report of what the actual costs were and
this have appraised in order to decide whether cost is higher or lower than the
expected or about right. If costs are higher than expected, they want to
know the reason in order to take corrective against future reoccurrence and if
cost are lower, they will want to know the reason why, in order to take action
that will perpetuate such cost savings. However, to decide whether cost
is higher or lower, that must be a yardstick. This yardstick is what
costs ae expected to be a comparison of actual cost with the yardstick must be
made. This yardstick is the standard we are expected to achieve and
therefore called STANDARD COST. This idea of yardstick is the technique applied
nearly by 85% of organization in manufacturing sector.
As a result, the management foreman, supervisor and
employee become cost conscious, a circumstance that in-turn intend to reduce
and encourages the optimum allocation of scarce resources.
Standard Cost Accounting as a management technique can be
said to have started long ago. Although it might not have been the
practiced now because of modernization. Traders made projections with
regards to these resources before embarking on their business transaction which
is exactly what standard costing system set to achieve, though in a more scientific
advancement in industrial resolution, management has gone a long way in setting
dependable accounting standard to achieve overall organization goals,
management is able to achieve effective and efficient planning and controlling
of cost towards realizing organization goals. This study focuses solely
on the manufacturing sector of the economy. Manufacturing sector is an
important institution of the economy and their role may be categorized into two
major aspects.
1. The real manufacturing
of goods needed by the society.
2. The sales of these goods
to the society.
This study is focusing on these two functions as to how
the manufacturing sector has been able to achieve standard performances.
It also studies how standard are being achieved in view of the current economic
depression in the country. Standard costing can be defined as a predetermined
calculation of how much cost should be under specific working condition.
It is built from an assessment of the value of material, labour and other cost
components are rate expected to apply during the period in which standard cost
is intended to be used. Its main purposes are to provide basis for control
through variance analysis, for the valuation of stock and work in progress and
in some cases for fixed selling prices (T Lucey 1999). The main points in the
definition are:
Standard Cost is a predetermined
calculation of what ought to be under specific working condition. Standard cost
is built up by correcting standard quantity (of machine time, labour time and
material) and forecast of future market trend for price standard (price of
material wages rate, machine cost per hour etc.)
–
Standard Cost provides basis for control through variance accounting.
–
Standard Cost provides basis for valuation of stock and work in progress and in
some cases, for fixed selling prices.
Basically, there are two groups of standards.
i.
Quantity standard
ii.
Prices standard.
Quantity standards are set on the basis of forecast of
market trends. It is important to note that quantity, standard should not
be revised frequently while price standard essentially require a frequently
while price standard essentially require a periodical revision.
Variance accounting refers to difference between the
standard sets and the actual result in a given period. Variance enable the management to know which element or
component of costs that is not efficiently controlled during production.
As a result, step can be taken to ensure an improvement where the result is
favourable or institute more control where the result is unfavourable.
However, every activity and operation of an organization
involves cost. It must be emphasized, that the existence of a sound well
organized basic costing system is fundamental to whatever use is made of the
information whether for routine cost ascertainment purposes or for a one – off
decision.
Decisions depend on financial factors therefore it is of
utmost importance that proper costing methods and techniques suitable for an
organization operation to be ascertained, adopted and operated effectively and
religiously throughout the organizations` process and operations. In essence,
organization are established for a defined purpose which objective can only be
seen or shown to the world by the output (product) it produces. For there to be
an output the most necessary is the input. Inputs do not come for free;
payments have to be made on them. Taking the Nigerian Bottling Company (NBC) as
a case study, it needs inputs in the form of raw materials, labour etc. to
produce goods (soft drink) and payment must be made for these inputs, this
boils down to cost.
1.2 Statement
of The Problem
In the past, many companies have witnessed considerable
lapses and increasing changes in management disciplines. Costing an important
element in the overall operation of an organization through the provision of
relevant information about cost is one of the problems organizations are
facing. Because there are no satisfactory requirements to maintain detailed
cost records, some small firms keep only traditional financial accounts and
prepare cost information in an ad-hoc-fashion. In all but small firms this
approach is likely to be unsatisfactory. There is a vast range of systems in
operation ranging from simple analysis to computer-based accounting systems
incorporating standards, variance analysis and the automatic production of
control and operating statements. These different costing methods are meant to
suit different organization the adaptation of the wrong method, for a company
will constitute a problem instead of a solution. Also, poor or inadequate
knowledge of a particular method of costing has constituted problems for many
firms. Most companies are still using the simple analysis system to set cost
while some companies do not even have a costing system. This no doubt has led
to poor planning, control and decision making.
With the ever-increasing complexity of business and
dynamic conditions of the business environment, makes it difficult: for a
company to consistently earn profit that entails fair returns. Management
has to be a plan of action for the business if its profits are to be
protected. There are some problems management face both internal and
external that warrant them to have a standard management control and planning
systems to tackle these problems.
1.3 Research
Objectives
1.3.1 Primary objective
The primary objective of the study is to
assess the role of using standard costing in management control and planning in
manufacturing companies in Nigeria.
1.3.2 Secondary objectives
To achieve the primary objective, the
following secondary objectives will be pursued:
i.
to
investigate the relevance of standard costing in modern manufacturing
organisations
ii.
to
contrast the benefits and drawbacks of modern alternatives
iii.
to
investigate the factors that influence the accuracy of standard costs
1.4 Research
Questions
1.
Are there any other benefits of standard
costing in management control and planning?
2.
Are there any other limitations or
difficulties to use standard costing?
3.
What are the factors that affect the
accuracy of standards?
4.
Does strict adherence to standard cost
technique enhance profitability level and growth of an organization?
1.5 Research
Hypothesis
Ho: Use of standard costing technique enhances
profitability level, decision and growth of an organization
Hi:
Use of standard costing technique does not enhance profitability level,
decision and growth of an organization
1.6 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 standard cost 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
standard cost 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 standard cost technique as a 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 standard cost 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 standard costing technique in Nestle Food Plc from 2016—2020
years of their financial statement.
1.8 Definition of Terms
Standard cost: The planned unit cost of the product,
component or service produced in a period. The standard cost may be determined
on a number of bases. The main use of standard costs is in performance
measurement, control, stock valuation and in establishment of selling prices
(CIMA, 2008).
Management Accounting: This is 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.
Total Quality Management: Total Quality Management is
a business philosophy aimed at minimizing errors and maximizing customer
satisfaction (CIMA, 2011: 421).