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APPLICATION OF MARGINAL
COSTING TECHNIQUES IN MANAGEMENT DECISION MAKING IN NESTLE FOOD PLC
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.
TABLE OF CONTENTS
Contents
Pages
Title Page
i
Certification
ii
Dedication iii
Acknowledgement
iv
Abstract
v
Table of Contents
vi
CHAPTER ONE:
INTRODUCTION
1.1 Background of
the Study
1
1.2 Purpose of
Study
4
1.3 Research
Questions
4
1.4 Statement of
Hypothesis
5
1.5 Significance
of Study
6
1.6 Organization
of the Study
7
1.7 Limitation and
Scope of Study 7
1.8 Definition of
Terms
8
Reference
10
CHAPTER TWO:
LITERATURE REVIEW
2.1
Introduction 11
2.2 Application of
Marginal Costing – Make or Buy Decision 22
2.3 Cost
Behaviour
24
2.4 The Treatment
of Fixed Costs 28
2.5 Marginal
Costing Techniques Versus Absorption
Costing Technique
32
2.6 Application of
Marginal Costing Techniques
33
2.7 Decision
Making with Limiting Factors And
Product Mix
35
2.8 Benefits of
Marginal Costing 36
2.9 Problems of
Marginal Costing 37
2.10 Current
Literature Based on Each Relevant Variable,
Model and Theory
38
2.11 Basic Concept of
Cost Accountancy
40
2.12 Cost
Accounting
47
2.13 Contribution
Margin
56
2.14 Historical
Background of Nestle Nigeria Plc 58
References
62
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1
Introduction
63
3.2 Research
Design
63
3.3 Re-Statement
of Research Questions 64
3.4 Re-Statement
of Research Hypotheses 64
3.5 Population of
the Study
65
3.6 Sample and
Sampling Technique 65
3.7 Research
Instruments
66
3.8 Methods of
Data Collection
67
3.9 Analytical
Tools
67
3.10 Reliability of
Instrument
68
3.11 Validity of
Instrument
68
CHAPTER FOUR: DATA
PRESENTATION AND ANALYSIS
4.1
Introduction 69
4.2 Analysis and
Interpretation of Data 69
4.3 Testing of
Hypotheses and Interpretation 83
4.4 Discussion of
Tested Hypotheses 85
CHAPTER FIVE:
SUMMARY, CONCLUSION AND
ROCMMENDATION
5.1 Summary
86
5.2
Conclusion
87
5.3
Recommendation
87
5.4 Suggestion for
Further Studies
89
Bibliography
90
Questionnaire
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.
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