PRODUCTION COST CONTROL IN MANUFACTURING ORGANIZATION

By

ENEH CHARITY

Presented To

Department of Accountancy

TABLE OF CONTENT

Cover Page I

Title page II

Approval page III

Dedication IV

Acknowledgement V

Table of content VII

CHAPTER ONE

1.1 Introduction 1

1.2 Examples of manufacturing

organisation and other production cost 4

1.3 Definition of terms 10

CHAPTER TWO

2.1 Production cost control definition 12

2.2 Importance of cost control 15

2.3 Needs for cost control 16

2.4 Cost control and reduction techniques 16

2.5 Production control system

in manufacturing organisation 20

2.6 Uses of budgetary control system in cost control 23

2.7 Uses of internal control system in cost control 26

2.8 Over time and preparation of wages. 27

CHAPTER THREE

3.1 Conclusion 28

3.2 Recommendation 29

Bibliography 33

CHAPTER ONE

1.1 INTRODUCTION

The main aim of this research is an attempt to verify the indiscriminate increase in the prices of commodities produced in this part of the country by manufacturing organizations and companies. This continuous rise in prices has attracted the attention of many citizens, mostly those who are ignorant of the adverse effect of this continuous rise in price on the citizens and the country economy.

This research paper will therefore aim at giving a comprehensive account of the control of cost in the production field with emphasis on the manufacturing organizations. The attribute of every organisation is the pursuit of a goal and this goal exists in different forms.

It is evident, therefore that every manufacturing organisation be it sole, partnership, corporation, among others has an objective and this primary objective is profit maximization. Other objectives such as social are purely secondary and solely depend on the profit.

Profit is the surplus or excess of total income over total cost during a specific period of time. It therefore follows that before any organisation can make profit they must exercise control over their production services.

There are others still under production and only the best ingredients are used for production in PRODA, Administration and staffing. Although the governing board has responsibility for general management as set out in the natural science and technology act 1980, the day to running of the institute is the function of the director of research.

Administratively, the institute is organized into division science, engineering, ceramics, and administration.

The active divisions from the point of view of research and development functions are science, engineering and ceramics.

In order that both research and development work and their production work are given equal emphasis each of these activities divisions is in turn organized into research units.

Production cost in manufacturing organizations is the aggregate of cost that is been accumulated by some natural classification and allocation so as to reflect the cost involved in the production of an item.

The accumulation of costs and allocation of cost are normally carried out using the three basic elements of cost namely;

a. Direct material

b. Direct labour

c. Factory overhead

1.2 EXAMPLES OF MANUFACTURING ORGANISATION AND THEIR PRODUCTION COST.

The examples of manufacturing organisation that is used is the Project Development Institute Agency (PRODA). The objective is to access the various production cost control techniques and effectiveness as well as the efficiency. The deficiency is the system and the recommendations for solving the problems is identified. On this grounds therefore, the information obtained from the use of their questionnaire is presented and analysed.

PRODUCTION COST

MATERIAL COST: The material cost comprises of all materials obtained by the institute for production. Some of these materials produced by the institute for production are:

a. Metal plates

b. Stainless steel

c. Clay

d. Glass and

e. Others

Most of these raw materials used by the institute are exported. Most often, the institute requested for the maximum quantity, which can be stored irrespective of the economic order quantity consideration. This is purely due to the prevalent import restrictions for the importation of these materials.

On receipt of these imported raw materials, they are put in stores, which are being taken care of by the storekeeper or the store manager as the case may be. when these raw materials are needed for production, the production section or department will make requisition order, which is lodged with the store officer who then authorized the collection of the required quantity. The requisition order is sent to the account section where they are charged to the production section as a variable cost. The quantity issued is also entered in the store record.

The requisition order or note is designed in such a way that a code column is provided where the raw material codes are indicated. The theoretical model of Economic order quantity in determining the material need is advantageous to the institute management, but the existence of the prevailing circumstances compel it to resort to a system where the availability and possibilities of import restrictions determines the quantity of raw material needed.

LABOUR COST: The institute operates a unique system of labour cost control. A labour budgeted is prepared monthly. It is decided and précised that its execution constitutes an effective control mechanism on labour cost. Although the availability of raw material to be used is determined by labour utilization, the level of labour utilization is also determined by availability of raw material.

The institute uses a system of register such that each employee writes his name and time as he enters the entrance gate of the factory. In the same way he signs out whenever he leaves, to record exist. This however, is just to ensure that the employee is within the premises. This check register aids in the preparation of wages sheet.

The employees in the institute are of a fixed salary scale. The form of piece work rate system and incentive scheme tied to the level of production is not in operation.

OVERHEAD COST : Overhead cost is generic name for cost of material and services, not directly added to or readily identifiable with the product, or services constituting the main object of an operation. The overhead cost can be called manufacturing cost or indirect cost.

The institute's overhead cost comprises of fuel, oil, diesel oil, packaging cost, electricity and exercise duties among others.

Most of the institutes overhead cost element are obtained locally and as such it had to an extent reasonable level of control over price factor and the usage factor.

Any officer who needs these elements must fill the requisition note, sign it and send it to the account section for recording purposes. With the use of appropriate code, the specific element to be identified and charged with the cost of the production overhead. The basis of absorption of overhead cost is production volumes. Overhead absorption becomes of greater importance when dissimilar products are made which require different production process.

The objective of the overhead absorption process is to include the total cost of production, an appropriate share of the institute's total overhead, an appropriate share is generally taken to mean account which reflects the effort and time taken to produce a unit or complete a job. In the unlikely event of identical products being produced by identical process for the whole of a period, the total overhead could be shared equally among the products. Life is rarely so simple and a cope with practical situation, various absorption based has been developed. To be able to compute the overhead to be absorbed by a cost unit is adopted by the institute. It is calculated using the overhead attributable to the absorption rate. it is deemed most suitable thus;

TOTAL OVERHEAD OF COST

Overhead Absorption Rate (OAR) = Total number of units absorption - The total overheads of a cost center of elements are established by the institute, by the processes of cost allocation and cost apportionment.

FIXED COST; These are costs that do not change even when there is a change in the capacity or volume of production. The fixed cost of the institution includes: Access road, patent and the fixed element of the overhead cost include: depreciation, vehicle running cost, repairs and maintenance. These added to the labour cost forms the fixed cost.

1.3 DEFINITION OF TERMS

i. COST CENTER: A cost center is defined as "A location, person, or item of equipment (or group of these) in respect of which cost may be ascertained".

ii. COST: This is the amount of expenditure (actual or national) incurred on, or attributable to a specific thing or activity.

iii. COST UNITS: A quantitative unit of product or services in relevant to which are ascertained.

iv. ONTROL: Control is the monitoring of activities tonsure that organizational goal and objectives are achieved as planed. It is the measurement of the set out goals of a firm to achieve an objective or aim.

v. MANUFACTURING: this is the transformation of materials into other goods through the use of labour and factory facilities.

vi. MANUFACTURING ORGANISATION: It is defined as the industry that turns primary products into manufactured goods.

vii. BUDGETARY CONTROL: This is the establishment of departmental budgets relating responsibilities of executives to the requirements of a policy.