APPLICATION OF MARGINAL COSTING TECHNIQUE IN A MANUFACTURING COMPANY (A CASE STUDY OF NESTLE NIGERIA PLC)
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APPLICATION OF MARGINAL
COSTING TECHNIQUE IN A MANUFACTURING COMPANY (A CASE STUDY OF NESTLE NIGERIA
PLC)
ABSTRACT
This research work examines the importance of application of
marginal costing technique in a manufacturing company using Nestle Nigeria Plc
as a case study. It shows that application of marginal costing technique is a
survival tool in Nigeria present economic situation.
It also shows that effective control of production and
distribution of operational cost arises from the intelligent application of
operational control, adequate cost accounting systems, analysis of cost data
and variances, formulation of product policies and using of already established
budgets.
In carrying out this research work, primary and secondary
data were used. The primary source of data was through questionnaires, which
was administered to the targeted staff. The secondary data method was also used
to collect information for this study and it involves engaging in desk research
with review of relevant textbooks, journals and magazines
The research study revealed that application of marginal
costing is a necessary tool for organization overall performance.
Based on the finding of this study, management should put
adequate measure in place to ensure compliance with standard, appreciate the
need for training of staff to improve their level of competence in order to
discharge their duties effectively and efficiently.
TABLE OF CONTENTS
CHAPTER ONE
2.1 Introduction to
the Study
2.2 Historical
Background of Nestle Nigeria Plc
2.3 Purpose of
Study
2.4 Significance of
Study
2.5 Scope and
Limitation
2.6 Hypotheses
CHAPTER TWO
2.0 Literature
Review
2.1 Meaning of
Marginal Costing
2.2 Theoretical
Framework
2.3 The Importance
of Marginal Costing To Management
2.4 Marginal
Costing and Pricing
2.5 Advantages and
Disadvantages of Marginal Costing
2.6 Pricing
Strategy
2.7 Marginal
Costing Vs Absorption Costing
2.8 Principles and
Applications of Marginal Costing Price Fixation
2.9 Accounting
Function, Cost Control and Responsibility Accounting
2.10 Break-Even Analysis
2.11 The Nigeria Present Economic Situation
CHAPTER THREE
3.0 Research
Methodology
3.1 Research Design
3.2 Research
Instrument
3.3 The Use of
Questionnaire Method
3.4 Personal
Interview
3.5 Population
Characteristics
3.6 Sample Size
CHAPTER FOUR
4.0 Analysis of
Data and Presentation
4.1 Introduction
4.2 Analysis of
Data and Classification
4.3 Analysis of
Data According To Test of Hypothesis
CHAPTER FIVE
5.0 Summary,
Conclusion and Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
CHAPTER ONE
1.0 INTRODUCTION TO
THE STUDY
This project is designed to evaluate the application of
marginal costing technique in a manufacturing company with special reference to
Nestle Nigeria Plc as a case study.
It therefore examines the techniques of marginal costing as a
tool of industrial survival in the Nigeria present economy. The project will
also examine cost control system of Nestle Nigeria Plc so as to know whether or
not a control system exists.
The effective control of production and distribution of operational
cost arises from the efficient application of operational control, adequate
cost accounting systems, analysis of cost data and variances, formulation of
product policies and using of already established budgets.
Marginal costing techniques (MCT) will be ascertained in
Nestle Nigeria Plc as related to:
1) Various
methods of valuing material issues.
2) Labour
remuneration.
3) Determination
of marginal costing per unit of a product.
4) Purchasing
procedures.
5) Store routine,
store control and issue of material.
6) Ascertain
actual cost per unit.
Marginal costing and its application
This is a well-known concept of economic theory. It may be
described as the change in total cost which arises as a result of an increase
and or decrease by one unit in volume of output. Marginal cost is an amount at
any given volume of output by which aggregate costs are changed if the volume
of output is increased or decreased by one unit.
Marginal cost is synonymous with variable costs, prime costs
plus variable overheads in the short run but, in a way, would also include
fixed cost in the planning production activities over a long period of time
involving an increase in the productive capacity of business. Theoretically marginal
cost and differential cost are the same. If there is no change in fixed cost
then both of these costs will be same. Thus marginal cost does not include
fixed cost at all whereas differential cost may include an element of fixed
cost as well if fixed cost changes due to a decision.
Marginal costing is a very important technique of decision
making. It is a comparatively new area in the field of accounting but it is
gradually gaining more and more acceptance. It is the method of matching cost
with revenue to determine periodic income. It is the ascertainment of marginal
cost and of the effect on profit of changes in volume or type of output by
differentiating fixed costs and variable cost. In this context it should be
noted that it is not a system of costing like process or job costing but it is
simply an approach to the presentation of accounting information meaningful to
management. In this all cost are segregated into fixed and variable components.
Only the variable costs are regarded as product cost and are used to value
inventory and cost of goods sold. The fixed costs are treated as period cost
and are charged directly to profit and loss account. Thus no part of fixed
manufacturing cost is deferred to the next period as inventory. While preparing
a profit and loss account on marginal costing basis, the variable or marginal
cost of sales is deducted from sales value and the difference is termed as
contribution margin.
The technique of marginal costing is a valuable aid to
management in taking various policy decisions. The following is one of the
problems where managerial costing analysis is useful:
Pricing of products: product pricing is usually considered to
be a difficult problem, particularly in non-repetitive production. The problem
is to equate the demand and supply in such cases marginal costing is very
helpful. This technique can help management in fixing prices in such
circumstances:
(a) A trade depression in industry
(b) Dumping
(c) A seasonal fluctuations.
1.1 HISTORICAL
BACKGROUND OF NESTLE NIGERIA PLC
Nestle Nigeria Plc is a member of the respected and
trustworthy nutrition; health and wellness company renowned world-wide for its
top and high quality products. The company commenced simple trading operations
in Nigeria in 1961 and has today grown into a leading food manufacturing and
marketing company. Nestle was listed on the Nigerian Stock exchange on April
20, 1979. Nestle S.A of Switzerland and Nestle CWA Ltd, Ghana are the major
shareholders of the company, controlling 31.17% and 59.13% of the company
respectively.
RAW MATERIAL SOURCING
Nestle Nigeria procures some of its raw materials such as
corn grains, Soya beans, cocoa powder and sorghum locally from farmers through
contractual and partnering arrangement that enables them benefits from the
technical advice and assistance of the company continuous supply of raw
materials that meet its high quality standards. Nestle also imports some of its
raw materials which include Monosodium Glutamate, Milk Skimmed Powder, Full
Cream Milk powder & Salt through Suppliers. The company's objective is to
satisfy the requirements of consumers with high quality food products by
ensuring safety and quality of its product from raw materials till the finished
products get to the final consumer. The suppliers are also aware of this objective
and they ensure compliance with all Nestle Food Safety Standards.
CORPORATE HEAD OFFICE
The Corporate Head Office is situated at Ilupeju Industrial
Avenue, Lagos. This is the administrative office where customer servicing,
demand and supply planning and vendors payment takes place. Other departments
in Head Office include Human Resources, Finance and Control, Import and Export,
Purchasing and Sales.
MANUFACTURING
The manufacturing complex is located at Agbara Industrial
Estate, in Ogun State. The main production units were designed in line with
modem manufacturing methods which ensure efficient production of the following
products: Nutrend, Cerelac maize, Cerelac Wheat, Milo, Maggi varieties,
Chocomilo and Golden Mom. Nestle Nigeria also imports some of its finished
products which include Nescafe, NAN, Nido Milk etc.
Nestle Nigeria recently commissioned a new manufacturing
complex known as Flower gate factory which is located in Shagamu, Ogun State.
This new manufacturing complex will further strengthen Nestle Nigeria's role as
the largest culinary manufacturing operation on the African continent. Spread
over an area of 36.3 hectares, the new 12-hectare facility specializes in the
production of Maggi products and more specifically in Popularly Positioned
Products (PPP) varieties of this popular brand. Nestle's PPPs are products
adapted to meet the specific requirements of emerging consumers in terms of
price, accessibility, format, and nutritional benefits and they are a key
driver for the future growth of Nestle's operations in Nigeria. Many of the
Maggi products in Africa are iodine fortified to help combat iodine
deficiencies among the local population.
DISTRIBUTION FACILITIES
The Distribution Centre is located at Otta, in Ogun state.
The distribution system ensures the widest possible penetration into the
nation's markets at a Pan-Nigeria Price, which is the same for every buyer
anywhere in Nigeria. At the heart of the system is the Distribution Centre,
which occupies an eight-hectare in Otta Industrial Estate.
HUMAN RESOURCES AND TRAINING POLICY
Nestle Nigeria currently has a total number of 2,216
employees. Continuous attention is given to training and development of staff at
all levels to improve their technical competence and prepare them for future
challenges and career opportunities. In addition to internal courses and
seminars with the company, it also uses its training facilities all over the
world in collaboration with its technical advisers, Netsuke Limited of
Switzerland. Some managers are currently on expatriation in other Nestle
markets which include Switzerland, Ghana, Cote d'Ivoire, United States of
America, United Arab Emirates and Australia under the Company's International
Management Exchange Programme. In line with its policy, Nestle Nigeria also
awards Secondary and tertiary education scholarships to deserving Children of
its staff. The scope and value of the awards are constantly reviewed and
improved.
1.2 PURPOSE OF STUDY
The purpose of this study (research work) is to evaluate and
examine the various applications of Marginal Costing Techniques as a survival
tool in the Nigeria present economic situation. Some of the objectives are
summarized as follows:
i. To
understand the meaning and principle on which marginal costing operates and the
purpose for which it is used.
ii. To find a way of controlling cost in order to break even
as well as to help the cost accounting system of the industry to calculate cost
and value of stock accurately.
iii. To provide an appropriate basis for closing stock
valuation and work in progress.
iv. To look into the existence and application of the basic
principles of marginal costing techniques in Nestle Nigeria PIc.
v. To
ascertain the relationship between costs incurred in the production process to
the level of activities and the revenue generated for effective management
decision.
1.3 SIGNIFICANCE OF THE STUDY
This refers to the importance and benefits of the project
work to the manufacturing organization and to the Nigeria economy as a whole.
These are hereby highlighted below:
i. The study
will be of immense benefit to students and Accountants in the Manufacturing
outfit.
ii. The study will
create a massive awareness on the risks involved by using this technique during
short run or one-off situation.
iii. The study will
establish and ensure that information provided for decisions making are very
much reliable.
iv. The study will
encompass the ways of distinguishing between fixed cost and variable costs.
1.4 SCOPE AND
LIMITATION
It is part of the management responsibilities to set up and
implement controls in an organization. This project will look into the various
marginal costing techniques and cost control in Nestle Nigeria Plc with
references to:
i. The need for
costing and marginal costing techniques.
ii. The role of
Nestle Nigeria Plc as per the use of marginal costing technique in the company.
The project will also look at information necessary for short
term decision making and how marginal costing can provide suitable information.
Limitation, however, to this study will include lack of time due to other
academic works, financial constraint which will make the scope of the study to
be limited to data provided by the management of the company
1.5 HYPOTHESIS
1. Ho: Variable
cost of production does not change with the level of activities.
Hi: Variable cost of production changes with the level of
activities.
2. Ho: Inflation
does not affect the demand for units of goods.
Hi: Inflation affects the demand for units of goods.
3. Ho: A sound
marginal costing techniques do not influence the survival of a manufacturing
company.
Hi: A sound marginal costing techniques influence the
survival of a manufacturing company.
4. Ho: The level
of production is not influenced by the demand for product.
Hi: The level of production is not influenced by the demand
for product.
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