MARGINAL COSTING TECHNIQUES: IT’S EFFECTIVENESS AS MANAGERIAL TOOL FOR PROFIT PLANNING AND DECISION MAKING IN MANUFACTURING COMPANIES (A Case Study of Selected Manufacturing Company in Ilorin, Kwara State)


MARGINAL COSTING TECHNIQUES: IT’S EFFECTIVENESS AS MANAGERIAL TOOL FOR PROFIT PLANNING AND DECISION MAKING IN MANUFACTURING COMPANIES (A Case Study of Selected Manufacturing Company in Ilorin, Kwara State)  

ABSTRACT

All over the world, business are set up ultimately to make and maximize profit. Effective planning is sino-qua-non to the attainment of this objective. Since profit is the “Life Wire” of any organization, it becomes expedient that such profits be planned for and by doing, decisions capable of affecting the long term efficiency of the business are made.

This study is carried out to test the effectiveness of marginal costing techniques as a management tool for profit planning and decision making in manufacturing companies. Two hypothesis were tested on the effectiveness or otherwise of marginal costing technique and the relationship between three significant valuable (cost, volume and profit) in profit planning and decision making

The finding of the analysis carried out suggested that marginal costing is a vital tool in the area of profit) planning and solid decision making.

However, marginal costing technique is not totally independent and therefore should not isolated from other techniques. The combination of the techniques with other powerful techniques such as budgetary system, overhead absorption costing e.t.c. will produce a better result.

Finally, for marginal costing techniques to serve its purpose there are a number of limiting assumption upon which it is based and these must be fully recognized.

TABLE OF CONTENT

Title Page

Certification

Dedication

Acknowledgement 

Table of Content

Abstract

CHAPTER ONE: INTRODUCTION

1.1 Introduction

1.2 Background of the Study

1.3 Statement of Research

1.4 Justification of the Study

1.5 Objective of the Study

1.6 Statement of Hypothesis

1.7 Scope of the Study

1.8 Definition of Term

1.9 Plan of the Study

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

2.1.1 Stock Valuation and Operating Under Marginal Costing

2.1.2 The Difference between Marginal Costing and Other Related Concept. Absorption Costing.

2.2 Development of the Basic technique Used in Marginal Costing Approach

2.2.2 Integration of Cost Accounting and Financial Accounting

2.3 Cost Volume-Profit (C.V.P) Analysis; An application of marginal Costing.

2.3.1 Approaches To Cost-Volume Profit Analysis

2.3.2.1 Equation/Mathematical Approach

2.3.2.2 Contribution Margin/Unit Approach

2.3.2.3 Contribution Margin for the Approach

2.3.2.4 Graphical Approach

2.3.3 Criticism and Limitation of Cost-Volume Profit Analysis

2.3.4 Importance and Application of Cost Volume Profit Analysis

2.4 Conclusion

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

3.2 Research design

3.3 Population of the study

3.4 Source of Data

3.5 Sampling Method

3.6 Data Collection

3.7 Data Analysis Procedures

CHAPTER FOUR: ANALYSIS AND INTERPRETATION OF DATA 

4.1 Introduction

4.2 Regression Analysis

4.2.1 International Tobacco Company Plc; Manufacturing Cost Progression Analysis

4.2.2 (a) International Tobacco Company Plc; Operating Profit Progression Analysis

4.2.3 (b) 7up Bottling Company, Ilorin Operating Profit Regression Analysis.

4.3 Test of Hypothesis and Interpretation of Result

4.3.1 Hypothesis One

4.3.2 Hypothesis Two

4.4 Summary of the Result Finding

CHAPTER FIVE: SUMMARY, CONCLUSION AND POLICY RECOMMENDATION

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

References

Appendix

CHAPTER ONE

1.1 INTRODUCTION

Marginal costing techniques plays an important role in a manufacturing companies and also have effectiveness as a managerial tool for profit planning and decision making in manufacturing companies, in which over the years have been used by management cadire in planning the profit of an organization and had also served as a necessary tools in management decision making especially in the short-run.

The ultimate goal and objectives of any business organization is to make and maximize profit. This technique place emphasis on the separation of cost into their fixed and variable component hence, there is no clear out dichotomy between cost, volume and profit at different level of activities, where can be a useful guide in short term planning and decision making.

Marginal cost can be best applied to the following areas: 

i. Profitability of Department or Product: Marginal costing form is very useful for determining whether or not a department should continue to operate or whether a product should be eliminated.

ii. Profit Planning: Profit is not just accidentally or just a matter of luck. It must be purposely and deliberately planned for. According to Stephen A. Moscow.

iii. Reporting to Management: Marginal costing techniques cal also be used for both internal and external report to be and middle management.

iv. Controlling: the main purpose of a report is to take any necessary corrective action or measure which will take the form of control.

Controlling can be used to achieve reporting function. The fact that controlling is useful for reporting lie, on the fact that before accounting result can be reported to the management, the concerned department must have made attempts to control the solution before reporting to the management for the final decision making.

1.2 BACKGROUND OF THE STUDY

The success of any entity is measured in terms of the accomplishment. Its goals and objectives “A business objective is the study point business thinking and it provides direction for action and is also a way of measuring and effectiveness of action taken”.

The ultimate goal and objectives of any business organization is to make and maximize profit. Profit itself can be defined as the excess of total income over total cost incurred in the procurement of that income through other objectives such as maximizing shareholders wealth, turnover and benefit to employee are usually taken into consideration; maximum profitability is usually the ultimate goals because it ensures economic natural selection. That is, people will naturally proffer to invest in business with high profitability and on the long run, only profit maximizers survive the business environment.

Also worthy of note is the fact that, the achievement of any goal starts with planning. Since profit is a “Life-Wire) of any business organization, its profit to a large extent depend on the ability of the management to plan, organize, co-ordinate and execute policies effectively and product future situation and conditions. In profit planning, the enterprise decides the amount f profit it wards to make within a specified period of time and then carries out a feasibility study to determine what sales and activity base are needed to provide that profit within the limit of the resource available to the company, it’s strength and weakness and the threat it faces from its competitors.

Management at all cadres carryout plans to facilitate decision making on the other hand involves the process of identifying and selecting of course of action among alternatives to deal with a specific problem or take advantages of an opportunity. Many factors both qualitative need to be considered and for many decisions financial information is a critical factor.

Decision-making can be viewed as a three fold actually involving: 

i. Identifying a Problem

ii. Analyzing the data and

iii. Choosing a suitable decision rule.

These three activities collectively have an important bearing in accounting reports, which are used literally by management as well as by external users.

Marginal costing techniques had over the years been used by top management cadre in planning the profit of an organization and had also served as a necessary tool in managerial decision making especially in the short-run. It is defined as “The accounting system in which variable cost are charged to cost units and fixed cost of the period are written-off in full against the aggregate contributions”. It is of special value in decision making.

This techniques place emphasis on the separation of cost into their fixed and variable component hence, there is no clear cut dichotomy between marginal cost techniques and the cost volume-profit analysis except that while the former is dynamic, the later is static. As a matter of fact, cost-volume-profit analysis is an application cost, volume and profit of different level of activities, which can be a useful guide in short term planning and decision making.

1.3 STATEMENT OF THE PROBLEM

Despite the general acceptance and frequent use of marginal costing techniques, many establishment to adopt the techniques in some of its planning and decision making area. The reason for this development might vary from company to company.

Also, there are arguments as to the validity of marginal costing techniques in a real business situation into consideration putting into consideration. The assumptions surrounding it. These assumptions are:

a. That selling price of product without vary it different levels of output.

b. That the production capacity of the plant will remain fairly constant

c. That efficiency of operation will be constant whether or not these assumption can remain true or be valued in real business situation call for a research.

Most especially, there is dichotomy between the economical and the accountant’s view of marginal (or variable) cost. This has to do with the unit cost, volume of production, and profit. While the economist assumed a curvilinear relationship, the accountant assumed a linear relationship (the reasons for this difference in opinion will be discussed a linear relationship (the reasons for this difference in opinion will be discussed in the literature review).

However, this prompts the research to look into the books and records of selected manufacturing companies, to establish whether there is any  relationship whatsoever between costs, volume and profit, and the nature of the relationship there of.

Other problem area in the application of marginal costing techniques are:

1. SEPERATION OF COSTS: It is possible for the management to misjudge the behavior or cost in that, the split made between fixed and variable costs could be sometimed unreliable and that could lead to enormous conclusion. The begaviour of cost in relation to changes in the level of activity is so important that it forms the basis of the accounting classification of cost into fixed and variable costs.

2. VARIABLE COST RATE PER UNIT: The accountant’s view of the variable cost for unit could be in advertently misleading.

 This is due to the following reasons

a. Change in operating condition, for instance, from a one shift to a double shift per day situation.

b. The principle and application of the learning curve theory.

c. Change in the pattern of production range.

d. The state of the machine, level of motivation for labour and quality of resources available, goes a long way in determining the number of hours to produces a unit of a particular product.

Considering the assumption underlying the application of marginal costing techniques, the diver genus in views and opinions between profession in respect to the relationship between the variable (cost, volume and predict) all of which are major factor in the application of the techniques, and the other difficulties in the application such as; separation of costs and the determination of the variable cost rate per units, calls for the need for the researcher to establish whether the costing techniques had in anyway been effective as a marginal tools in profit planning and decision making.

1.4 JUSTIFICATION OF THE STUDY

Through the concept of marginal costing techniques had been adopted by many establishment, the assumption couple with other difficulties in its application as mentioned under the statement of the problem, justified the need of this study. Despite these limitations, the appraisal of the techniques proves that his reliable and effective as a managerial tool for profit planning and short-run decision making.

Other areas that make this research significant are:

1. It serve as a guide to the management of any manufacturing company in making effective plans geared towards profit making and also making sound and effective decisions relating to the following problem.

a. The analysis of cost, volume and profit

b. Determining of the product mix when a company is faced with constraints

2. The finding of this research work is capable of giving the “would be” managers and students in particular, an insight into what marginal costing technique involves. It could be trigger another research on the costing technique as it regards, planning of profit and the making of decision especially in the short-run.

1.5 OBJECTIVE OF THE STUDY

The main objectives of this study is to examine the extent to what marginal costing is used by the management of the selected manufacturing companies as a managerial tool in profit planning and decision making and how effective it has been in planning such profits.

The objective can further be broken down to include the following:

1. To determine whether there is any relationship between costs, the level of activity and the profit made by firms.

2. To determine if this interrelationship (if any)) can be used to effectively plan the profit of the firm or not.

3. To observe the effect of profitability on volume and seek to determine whether there are other factors other than volume of activity that affects profitability and how such factor affect the behavior of cost and profit.

4. To analyze in a descriptive manner, the important of marginal costing techniques in the making of decisions.

5. Lastly, to proffer suggestions on the application of the technique of marginal cost taking into account its assumption

1.6 STATEMENT OF THE HYPOTHESIS

In order to determine the relationship between variable (cost, volume and profit) and the extent of use and effectiveness of marginal costing techniques as a marginal tool for profit planning and decision making, call for investigation in the selected manufacturing companies and the following hypothesis were tested.

1. Ho: That there is no relationship between production cost, the level of activity and profit. 

2. H1: That there is relationship between production cost, the level of activity and profit.

3. Ho: That marginal costing technique is not effective as a managerial tool for profit planning and decision making in manufacturing companies.

4. H1: That marginal costing technique is effective as a managerial tool for profit planning and decision making in manufacturing companies.

Ho Null hypothesis

H1 Alternative hypothesis

1.7 SCOPE OF THE STUDY

This research is based on three non-randomly selected manufacturing companies within Ilorin. The three company cut across various industries like; Bottling, Tobacco, to allow for good representation. The decision to use more than one manufacturing company is bourn out of the desire to make a good generation from the conclusion draw from the study. The raw date used for the research work is collected from the production, accounting, sales and costing department of each of the company for ten year covering 2004-2013).

For the purpose of this research, costs are separated into first and variable costs. Management policies, techniques method and efficiency of employees and machine are assumed constant.

1.7 DEFINITION OF TERMS

Marginal cost viz-a-viz break even analyze is an analytical technique for studying the interrelationship between costs (fixed and variable), volume and profit at different level of activity. The researcher fined it exponent to define these concepts and other related ones, to enhance a better understanding of the subject matter.

i. COST: T. Lucey defined cost as “the account of expenditure (actual or natural) incurred on, or attributable to, a specified thing or actually”. The two types of cost in perspective in this study are:

a. VARIABLE COST: The fixed cost of any organization according to Lucey is “A cost which accrues in relation to the passage of time and which within certain output and turnover limit tend to be unaffected by fluctuation in the level of activity”. Examples are: rent rate, insurance and license fees on automobiles e.t.c.

b. VOLUME: It is a unit used to measure the level of activities. This unit of measurement is called the volume index.

c. PROFIT: This is the excess of total income or revenue over the total cost or expenses incurred in the procurement of that income. The component of profit are:

i. GROSS PROFIT: This imply the excess of net revenue from sales over the cost of goods sold. It is termed gross profit because operating expenses must be deducted from it. i.e. 

Gross Profit= Net Sales – Cost of Goods Sold 

Net sales= Total sales- Good Returned Inwards

Cost of Goods Sold=Opening Stock+Purchase- Closing Stock

ii. NET PROFIT: It s the excess of revenue over the expenses incurred in earning that revenue, i.e.:

iii. Net profit= gross Profit- Operating Expenses

Where, operating expenses= Selling Expended Administrative Expenses other expenses (operating) in a period.

d. CONTRIBUTION: This is the term given to the differences between sales and marginal (variable) cost.

e. OVERHEAD: The summation of cost of indirect labour, indirect material and indirect expenses is referred to as; overhead.

1.8 PLAN OF THE STUDY

The research project consists of five chapters.

CHAPTER ONE: In this first chapter, the general background nature of the study, i.e. an over view of marginal costing techniques is looked into.

CHAPTER TWO: The second chapter which is the Literature Review is broken down to include the following:

i. The development of the basic technique used in the managerial cost approach 

ii. Cost-volume profit analysis as an application of managerial cost approach

iii. The use of managerial costing technique

CHAPTER THREE: The third chapter is the research methodology; it deals with the methods the researcher used in collecting data and also the procedure which the analysis follows.

CHAPTER FOUR: The analysis of the data collected from the various companies used as case study based on the subject matter in relation to profit planning and decision making is done in this chapter.

The data is analyzed following the order as described in chapter three.

CHAPTER FIVE: The fifth and the last chapter deals with the summary of the findings, conclusion would be drawn on the research problems and recommendation made where necessary.

.

MARGINAL COSTING TECHNIQUES: IT’S EFFECTIVENESS AS MANAGERIAL TOOL FOR PROFIT PLANNING AND DECISION MAKING IN MANUFACTURING COMPANIES (A Case Study of Selected Manufacturing Company in Ilorin, Kwara State)



TYPE IN YOUR TOPIC AND CLICK SEARCH.






RESEARCHWAP.NET
Researchwap.net is an online repository for free project topics and research materials, articles and custom writing of research works. We’re an online resource centre that provides a vast database for students to access numerous research project topics and materials. Researchwap.net guides and assist Postgraduate, Undergraduate and Final Year Students with well researched and quality project topics, topic ideas, research guides and project materials. We’re reliable and trustworthy, and we really understand what is called “time factor”, that is why we’ve simplified the process so that students can get their research projects ready on time. Our platform provides more educational services, such as hiring a writer, research analysis, and software for computer science research and we also seriously adhere to a timely delivery.

TESTIMONIES FROM OUR CLIENTS


Please feel free to carefully review some written and captured responses from our satisfied clients.

  • "Exceptionally outstanding. Highly recommend for all who wish to have effective and excellent project defence. Easily Accessable, Affordable, Effective and effective."

    Debby Henry George, Massachusetts Institute of Technology (MIT), Cambridge, USA.
  • "I saw this website on facebook page and I did not even bother since I was in a hurry to complete my project. But I am totally amazed that when I visited the website and saw the topic I was looking for and I decided to give a try and now I have received it within an hour after ordering the material. Am grateful guys!"

    Hilary Yusuf, United States International University Africa, Nairobi, Kenya.
  • "Researchwap.net is a website I recommend to all student and researchers within and outside the country. The web owners are doing great job and I appreciate them for that. Once again, thank you very much "researchwap.net" and God bless you and your business! ."

    Debby Henry George, Massachusetts Institute of Technology (MIT), Cambridge, USA.
  • "Great User Experience, Nice flows and Superb functionalities.The app is indeed a great tech innovation for greasing the wheels of final year, research and other pedagogical related project works. A trial would definitely convince you."

    Lamilare Valentine, Kwame Nkrumah University, Kumasi, Ghana.
  • "I love what you guys are doing, your material guided me well through my research. Thank you for helping me achieve academic success."

    Sampson, University of Nigeria, Nsukka.
  • "researchwap.com is God-sent! I got good grades in my seminar and project with the help of your service, thank you soooooo much."

    Cynthia, Akwa Ibom State University .
  • "Sorry, it was in my spam folder all along, I should have looked it up properly first. Please keep up the good work, your team is quite commited. Am grateful...I will certainly refer my friends too."

    Elizabeth, Obafemi Awolowo University
  • "Am happy the defense went well, thanks to your articles. I may not be able to express how grateful I am for all your assistance, but on my honour, I owe you guys a good number of referrals. Thank you once again."

    Ali Olanrewaju, Lagos State University.
  • "My Dear Researchwap, initially I never believed one can actually do honest business transactions with Nigerians online until i stumbled into your website. You have broken a new legacy of record as far as am concerned. Keep up the good work!"

    Willie Ekereobong, University of Port Harcourt.
  • "WOW, SO IT'S TRUE??!! I can't believe I got this quality work for just 3k...I thought it was scam ooo. I wouldn't mind if it goes for over 5k, its worth it. Thank you!"

    Theressa, Igbinedion University.
  • "I did not see my project topic on your website so I decided to call your customer care number, the attention I got was epic! I got help from the beginning to the end of my project in just 3 days, they even taught me how to defend my project and I got a 'B' at the end. Thank you so much researchwap.com, infact, I owe my graduating well today to you guys...."

    Joseph, Abia state Polytechnic.
  • "My friend told me about ResearchWap website, I doubted her until I saw her receive her full project in less than 15 miniutes, I tried mine too and got it same, right now, am telling everyone in my school about researchwap.com, no one has to suffer any more writing their project. Thank you for making life easy for me and my fellow students... Keep up the good work"

    Christiana, Landmark University .
  • "I wish I knew you guys when I wrote my first degree project, it took so much time and effort then. Now, with just a click of a button, I got my complete project in less than 15 minutes. You guys are too amazing!."

    Musa, Federal University of Technology Minna
  • "I was scared at first when I saw your website but I decided to risk my last 3k and surprisingly I got my complete project in my email box instantly. This is so nice!!!."

    Ali Obafemi, Ibrahim Badamasi Babangida University, Niger State.
  • To contribute to our success story, send us a feedback or please kindly call 2348037664978.
    Then your comment and contact will be published here also with your consent.

    Thank you for choosing researchwap.com.