MARGINAL COSTING AS AN ESSENTIAL TOOL FOR DECISION MAKING IN A MANUFACTURING COMPANY

By

EZIKE EMILIA ADAOBI

Presented To

Department of Accountancy

113 Pages 14,717 Words 1,690 Views Microsoft Word Format No. of Chapters: 1 to 5 Chapters

PREFACE

This report revealed the result of an investigation into the marginal costing technique as an essential tool for decision making in a manufacturing company with a particular reference to the Anambra Motor Manufacturing Company (ANAMMC) Emene - Enugu.

This research offers the researcher the opportunity to study marketing costing as a tool for decision making as it is practiced in ANAMMCO. The report was articulated and systematically presented in five chapters.

Chapter 1: This chapter deals with the background of study, the statement of problem, the objectives of the study, the significance of the study, the scope of the study, the limitations of the study and also the definition of terms used in marginal costing and lastly the statement of hypothesis.

Chapter 2: Review of related literature: in this chapter the works of other writers and authorities in the subject is reviewed. It deals with marginal costing the principles of marginal costing, marginal costing and decision making in an organization, (acceptance of special order, make or buy decision) etc are some of the management decision making, the contribution margin theory, marginal absorption costing, the marginal costing and profit break even analysis and decision making and finally advantages and disadvantages of marginal costing.

Chapter 3: Research design and methodology: This chapter tends to overview the entire subject of study, it equally explains the sources of data, for the project work, sample method used, the method of investigation and finally all problem which the researcher encountered in data collection process.

Chapter 4: Data presentation and analysis: This chapter treats an overview of the subject, an analysis of responses and the testing of hypothesis earlier stated in chapter 1.

Chapter 5: Findings, Recommendation and conclusion. This chapter is the summary of the researchers findings, his recommendations and lasting conclusion of the project work.

ABSTRACT

Decision making has become a main concern to any organization and efforts are being made by management to make sure that best decisions are made. Therefore this study investigates the effectiveness and efficiency of marginal costing as an essential tool of decision making.

To determine this, the fundamental objectives of the study among others are:

(a) An evaluation of the marginal costing technique towards ascertaining the effectiveness and efficiency.

(b) Finding out any inherent deficiencies in its application.

(d) How products decisions are made by management under this technique

(e) And how management decision making is aided under the technique

In investigating the above data were obtained through questionnaire administered to management staff and few senior staff who have knowledge about the technique under application.

Moreso, useful pieces of information were got from libraries. The collected data were classified analyzed and interpreted by tabular discussion and simple percentage analysis and the hypothesis were tested by using the chi-square method. From the analysis of data, the major findings were that:

ANAMMCO apply marginal costing techniques in valuation of stock, cost planning and control.

(a) The company purposefully uses this technique for the following reasons:

i. Decision making

ii. Controlling of cost

iii. Fixing of prices

(b) ANAMMCO uses marginal costing because it is simple to operate.

(c) ANAMMCO uses marginal costing technique because it shows a meaningful and more realistic profit position of the company.

(d) The technique easily reveals the contribution made by each product or department.

(e) That when faced with decision about the best alternative the marginal costing technique is applied.

(f) When there is a special order in deciding whether to accept or reject the special order, marginal costing technique is used.

Based on the findings the following recommendation were made:

(a) The organization should find a way of ensuring that instrumentality is closely tied to productivity or output of the employee.

(b) Due to the difficulty associated were receipt of orders, the orders for basic raw materials should be made long in advance.

(d) The company budgetary control system should be supported with the standard costing technique for effective control of materials and labour cost.

Above all, I strongly believe that if those recommendations are accepted and vigorously pursued, the decision making will meet the set organizational objectives.

TABLE OF CONTENTS

Title page

Certification

Dedication

Acknowledgement

Preface

Abstract

Table of contents

List of tables

CHAPTER ONE

1.0 Introduction

1.1 Background of study

1.2 Statement of problem

1.3 Objectives of study

1.4 Significance of study

1.5 Scope of the study

1.6 Limitations of the study

1.7 Definition of term

1.8 Hypothesis

CHAPTER TWO

2.0 Review of related literature

2.1 Marginal costing

2.2 The principles of marginal costing

2.3 Marginal costing and decision making

2.3.1 Acceptance of special order

2.3.2 Add or drop decision

2.3.3 Make or buy decision

2.4 The contribution margin theory

2.5 Marginal versus absorption costing

2.6 Marginal costing and profit

2.7 The breakdown analysis and decision making

2.8 Advantages and disadvantages of marginal costing

References

CHAPTER THREE

3.0 Research design and methodology

3.1 An overview

3.2 Sources of data

3.3 Sample used

3.4 Method of investigation

3.5 Problem encountered in data collection

CHATPER FOUR

4.0 Data presentation and analysis

4.1 An overview

4.2 Analyses of responses

4.3 Hypotheses

CHAPTER FIVE

5.0 Findings, conclusions and recommendations

5.1 Summary of findings

5.2 Conclusions

5.3 Recommendations

Organizational chart

Bibliography

Appendix

LIST OF TABLES

Table I The contribution break even

2 Costing techniques are applied

3 How the costing technique is applied

4 Reason for using the costing techniques

5 Costing technique used inv having stock

6 How profit is generated using this techniques to estimate the profit position

7 How cost are allocated to different cost centre

8 How the performance of the costing technique can be assessed

9 Policy decision of the company

10 Use of computer in stock management

11 How the computer aid efficient management of stock

12 The method of valuing material issued out for production

13 Methods used in determining product price

14 Criteria used in decision take about alternatives

15 Determinations of the standards for material quantity

16 Technique(s) applied where there is a special order

17 Budgeted production and actual production compared

18 The range of variance observables

19 Chi-square for testing hypothesis

CHAPTER ONE

10 INTRODUCTION

11 BACKGROUND OF STUDY

The reality of modern business management in a free enterprises economic system in the level of competition among all enterprises where only the fittest enterprise survive The motive for maximization of profit in business and quest for wealth creation being in Hogue, management continues to remain under increasing obligation to improve its share of market, its assets, its credit worldliness and its overall potential

These in turn require an improvement in the quality of decision therefore in order to responds effectively to the challenges of time, management requires good factors in business decisions The research work is a real attempt to investigate into the principle and practice of marginal costing as an essential tool for decision making in manufacturing companies using Anambra Motor Manufacturing Companies (ANAMMCO) as a case study The study will critically examine the following:-

- The condition for analyzing cost into fixed and variable components

- How the cost are normally controlled

- And how management decision is ended under the techniques

An appraisal is necessary in order to determine effectiveness and efficiency of the management accounting technique In carrying out this research work, data was gotten from questionnaire, information and analysis of data using the percentage method to analyze the responses elicited from respondents Also the personal observation method were used together with relevant information from libraries

BRIEF HISTORY OF ANAMMCO

Against the background of rapid economic growth, the federal military government in 1975 was faced with the enormous task of developing the country's infrastructure from one geared towards farming to one oriented towards mechanized agriculture and industry

The Anambra Motor Manufacturing Company is the result of the economic and technological co-operation between the government and the people of Nigeria and DAIMLER - BENZ of the West Germany

The company is located at Emene Industrial Layout Enugu The site covers an area measuring over 300,000 square meter generously leased by the state government

Although the partnership agreement was signed in 1975 The company was incorporated in Nigeria on the 19^th of January 1977 under the name of Anambra Motor Manufacturing Company, as a private limited liability company with an authorized share capital of N7,000,000 ordinary share of N100 each all of which were issued and fully paid up

SHARE HOLDING

The share holding is as follows

DIAMLER BEN AG OF GERMANY - 4000

FEDERAL GOVERNMENT OF NIGERIA - 3500

ANAMBRA STATE GOVERNMENT - 120

IMO STATE GOVERNMENT - 40

RIVER STATE GOVERNMENT - 30

NIGERIA CITIZENS & ASSOCIATES - 60

10000

Despite the fact that the company was incorporated in 1977, the laying of foundation stone was done on 12^th of May 1978 by the military governor of the old Anambra state, Col John Atomkpeta The official commissioning of the plant was done on July 8^th 1980 by the president of the federal republic of Nigeria

12 STATEMENT OF PROBLEMS

In this study, we are to answer the question listed below:

a Can marginal costing restrict the arbitrary allocation of production cost on cost centered?

b With this technique applied in costing, can production not be increased hence increasing the amount of fixed cost in the production?

c When management is engaged with 2 or more alternatives, would marginal costing be a useful tool for selection or choosing the best alternatives?

13 OBJECTIVES OF STUDY

Marginal costing as an essential tool for decision making Marginal costing technique of cost accounting tends to separate cost into variables and fixed components Bearing this in mind, the objectives of this study among other things include:

- An evaluation of the marginal costing technique towards ascertaining its effectiveness and efficiency

- Finding out any inherent deficiencies in its application

- To determine the condition for cost control and analysis

- Examine how product decisions are made by management under this technique

14 SIGNIFICANCE OF THE STUDY

Since it is a technique of cost accounting adopted by an organization to measure its profit ability, any effort geared towards establishing how the technique helps in the profit realization of the organization is worth slide

Since this relationship is reciprocal, any suggestion on the improvement of the costing technique should have some bearing on profit improvement If output or productivity is to be enhanced and profit maximized, a knowledge of cost behaviour and analysis into the various components is essential and worth understanding

Based on the findings of the study and the suggestion proffered, it is strongly hoped that the profit will improve

15 SCOPE OF THE STUDY

This study is limited to the survey of how the marginal costing technique is used to make decision at the Anambra Motor Manufacturing Company (ANAMMCO) and how effective and efficient it is to the company This investigation is not to be taken as an exhaustive piece

16 LIMITATION OF THE STUDY

This researcher had difficulties in collecting all the relevant data required for an in depth evaluation of this subject This constraints emanated from the fact that the company (ANAMMCO) is said to be a competitive manufacturing company concern and the general manager considers it risky to issue out information required

17 DEFINITION OF TERMS

Manufacturing industry: A manufacturing industry is one that acquires raw materials and intermediate goods and transfer them to finished goods through an industrial process The definition satisfies the purpose of the study A manufacturing industry can also be defined as one where pre-occupation is the processing of materials into other goods through the use of labour and factory facilities

Marginal cost: Marginal cost is the amount at any given volume of output by which aggregate costs are changed of the volume of output is increased or decreased by one unit

The marginal cost of a product is alternatively known as its variable cost, which includes direct material, direct labour and direct expenses and the variable part of overheads

Marginal costing: Marginal costing is defined by CIMA's official terminology as "a principle whereby variables cost are changed to cost units and fixed cost attributable to the relevant periods is written off in full against the contribution in that period"

Fixed cost: Fixed cost is a cost that accrues in relation to the passage of time and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the level of activity It is treated as periodic cost and are changed in full to the profit and loss account of the accounting period which they are incurred

Contribution: Contribution is the different between sales value and the variable cost of those sales expressed either in absolute terms or as a contribution per unit This is the central point in marginal costing When the contribution per unit is expressed as the difference between the selling price and its marginal cost Marginal costing cannot be used without calculating the contribution

18 HYPOTHESIS

The following hypothesis are proposed for this study:

i Marginal costing principles aid prudent management decision making

ii Statement prepared using marginal costing principles are easier to understand by management

iii Marginal costing aid in the achievement of the organization goal