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The Project File Details
- Name: EFFECTS OF STANDARD COSTING ON THE PROFITABILITY OF MANUAL MANUFACTURING COMPANIES (A CASE STUDY OF NIGERIAN BREWERIES PLC. ALAKIA, IBADAN)
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The topic of this research is effects of standard costing on the profitability of a manufacturing company. The purpose of this study was to discover if the application of standard costing techniques have any effect on profitability, to explore the relationship between standard costing and the profitability of manufacturing companies and also to determine whether standard costing techniques and principles are being adopted and practiced in Nigerian manufacturing companies (Nigerian breweries Plc). The design of this study is descriptive survey method and the study was conducted in Nigerian Breweries Plc, Alakia Ibadan. Self administered questionnaire was used to collect data which was analysed using frequency table and chi-square. It was discovered that proper accounting records are kept and are significantly necessary in the management of the company, the company employed standard costing in costing their product and decisions were made with the standard costing information obtained in the company. The accounting reports were prepared and presented to the company’s management and that actions were taken promptly on the information given in the report. It was also discovered that effective application of standard costing has effect on the profitability of the company, the company benefited in a significant way through the use of standard costing especially in the improvement of profit. The researcher came to a conclusion that standard costing was widely used in Nigerian manufacturing companies and that standard costing enhanced adequate planning, control and decision making processes in the company. That standard costing enhanced manufacturing companies in the elimination of unprofitable products, provision of costing information and cost control.
TABLE OF CONTENTS
1.0 Introduction 1
1.1 Background to the study 2-4
1.2 Statement of the problem 4-5
1.3 Objectives of the study 5
1.4 Research questions 6
1.5 Hypothesis formulation 6
1.6 Significance of the study 7
1.7 Scope of the study 7-8
1.8 Justification of the study 8-9
1.9 Definition of relevant terminologies 9-10
2.0 Literature review 11
2.1 Concept of standard costing 11-16
2.2 Features of standard costing 16-29
2.3 Advantages and disadvantages of standard costing 30-33
2.4 Concept of profitability 33-35
2.5 Measurement of profit 35-38
2.6 Profit and profitability 38-39
2.7 Areas where standard costing improve profitability 40-45
2.8 Brief historical background Of Nigerian Breweries Plc 45-50
3.0 Research methodology 51
3.2 Area of Study
3.3 Population of the study
3.4 Research design 51
4.5 Sample and sampling techniques 53-54
3.6 Instrumentation for Data Collection 51-52
3.7 Reliability and validity instrument 52
3.8 Data Collection Procedures
3.9 Method of data analysis 55
4.0 Data presentation, analysis and Interpretation 56
4.1 Data presentation 56-66
4.2 Data Analysis and Interpretation
4.3 Testing of hypothesis 66-68
5.0 Summary, conclusions and recommendation 69
5.1 Summary of findings 69
5.2 Conclusions 70
5.3 Recommendations 71
5.4 suggestion for further research studies
Standard costing is a performance appraisal technique used by comparing actual performance against the standards for all areas of operations with the organization. This is done in discussion with various heads of organization segments. When actual performance takes place, the actual data are compared with standards; if there is a difference between actual and standards, the difference is analysed to find reason thereof. Deviation of actual from standard is called ‘variance’. Such variance, maybe ‘favourable’ or ‘Adverse’ for the organization Abdullahi, (2014). Controlling cost involves providing clear cut information on what the cost should be incurred, what the cost was actually incurred, what is the variance between what was and what should have been, why and what remedial action should be taken to ensure that the actual occurrence agree with the planned. Standard costing is a measure of comparison for quantity and qualitative values. It is a normal reference point for re-evaluation of performance. It has also been variously referred to as the preparation and the use of standard cost and measurement at the points of incidence Okoye, (2013). Standard costing is concerned with measures of efficiency, which describes how managers can have control over the acquisition and use of resources in producing a given quality of output.
- BACKGROUND TO THE STUDY
Standard costs are usually associated with a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer’s inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.
The effect of standard of standard costing on profitability has been a problem to manufacturing companies in Nigeria. The standard costing as a tool for either improving or not improving profitability. Unlike its contemporaries in the field of science, it deals with human beings and calculation significant information.
Lucey (2002) defined standard costing as a predetermined calculation of how much cost should be under specified working conditions; which establishes pre-determined cost and estimates of the cost of products and services, then compares these pre-determined costs with actual costs as they are incurred. Standard cost represents an estimated or pre determines total cost of product per unit for an organization. Adeniji (2009) states that the process of estimating the total cost of production per unit is described as standard costing technique.
Standard costing as a long established concept is the management function of planning and control. In effect, yardstick has been of vital importance for planning and control exercise. As a matter of fact, problems associated with production and earning a profit was recognized for many years before the concept of standard costing was invented. Standard costing appeared in the early twentieth century when transaction volumes were always overwhelming the record keeping system used then. Since then, prevalent use of computer systems and automated data entry systems have reduced the need for standard costing, though not entirely eliminated.
These standard costs reveals goals, spur actions and efforts for effective management and equally provide checks such that exceptional profit oriented goal performance can be achieved and reserve adequate punishment to be exercised for bad performance. Standard cost cause appraisal to be made over production facilities and form management intentions and capabilities and is a first step strength and weakness appraisal. These led to the preference of standard costing system in 1920’s.
It was brought into the system such that total variances might be accumulated as well as detailed variances. These steps gave rise to formal expression that significant costs were not actual cost nor historical cost but standard or planning cost and their variances.
1.2 STATEMENT OF THE PROBLEM
In Nigeria today, the economy is extremely bad. In this respect, a lot of measures have been taken in the past to reverse the declining economic situation. Among the measures taken to revamp the economy include;
- Structural adjustment program (SAP)
- Second tier foreign exchange market
- Ban on importation etc
These measures have adverse effect on the buying attitude of the consumers. Cost of production has increased in manufacturing sector of the economy which in effect has resulted to high prices of manufacturing goods. In effect, no appreciable level of demand could be recorded by most manufacturers as the buyer’s purchasing power could no longer meet up with the rising price level. Most of the manufactured products were consumed by civil servants, public servants and other wage earners whose take home or pay can no longer take them home. In this regards, consumers utilize their little purchasing power mainly on foodstuff to sustain themselves first before luxury. With the economic recession, greater efforts should be made to keep cost to the lowest minimum through efficient and effective utilization of both human and material resources. The above mentioned does not end it all, other problems confronting the manufacturing sector are: Irregular Power Supply, Inadequate water supply, Bad roads, Foreign competition, etc.
1.3 OBJECTIVES OF THE STUDY
The following are the research objectives;
- To investigate the effect of standard costing techniques on the profitability of manufacturing companies.
- To assess the relationship between standard costing and profitability in manufacturing companies in Nigeria.
- To determine the need or relevance of standard costing techniques given the current technological advancement in Nigerian manufacturing industries.
1.4 RESEARCH QUESTIONS
- Does the application of standard costing techniques have any effect on profitability in manufacturing companies?
- What are the relationship between standard costing and profitability in manufacturing companies in Nigeria?
- Are standard costing techniques applicable or relevant with modern day technological advancement in the manufacturing industry?
1.5 HYPOTHESIS FORMULATION
To achieve the objectives of this study which is on the effect of standard costing on the profitability of a manufacturing company, the researcher formulated two hypotheses that will be tested in the process of this study. They are as follows;
- H0: The application of standard costing techniques has no effect on the profitability of manufacturing companies in Nigeria.
- H0: There is no relationship between standard costing and profitability in manufacturing companies in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
It is believed that standard costing aids management to plan for the future, and if any justification is required for this research project on the effect of standard costing on the profitability of manufacturing industries, the view of Robert Appleby (1999), one of the early British industrialist should be relied on. Appleby (1999) regarded the key to managerial success as the setting of standards for all business activities and measurement of performance against the standards. He states that financial measurement should penetrate into cranny of any enterprise and in doctrine all management in their working habit. In this regards, there is need to prove whether standard costing is a more viable and preferable option to other costing methods adopted for each products produced.
In effect, cost should be given maximum attention since revenue less cost gives a balance of profit. Profit should be increased as it is what every industry is aiming at.
1.7 SCOPE OF THE STUDY
This research project is restricted to the Nigerian breweries plc. The researcher focused on its Ibadan Brewery located at Egbeda Local Government Area of Oyo state. This industry operates under similar conditions as its counterparts within Nigeria and will present similar problems.
As regarding the limitations on this research project in view of financial constraint, it would be impossible to include all Nigeria Brewery Plc at every location; therefore, this study was limited to Ibadan brewery, Alakia, Oyo state.
Time constraint was another strong factor that posed a limitation to this research because the study was carried out when the researcher had so much academic work load and tight security at the brewery. Thus, it was difficult for the researcher to meet up some of the appointment with respondents. Another limiting factor to this research project was the uncooperative attitude of some staff(s)in the company who refused to be interviewed for fear of being reprimanded for divulging unauthorized information. These made it difficult for the researcher to collect all the expected primary data.
1.8. JUSTIFICATION OF THE STUDY
The justification made in the course of the research is: Standard costing is set; it remains unchanged as long as the method of operation and basic prices used to set them remain the same. Standard costing is operational. Management is furnished with periodic analysis of differences between causes and operational divisions responsible. Within the management, there is an established arrangement that enables prompt investigation and action to be taken on on-profit oriented or adverse significant variances. The Management system, should not be regarded as to allow the standard costs to be amended at intervals where need arises.
1.9 DEFINITION OF RELEVANT TERMINOLOGIES
Some of the terminologies used in this research project are defined as follows;
- Standard costing: implies setting up standard costs for goods and services.
- Labour standard: implies predetermining the exact grades of labour to be used as well the times involved. Planned labour time can be expressed in standard hours.
- Overhead standard: predetermined overhead absorption rates are the standards of overhead for each cost center using budgeted standard hours pre-determined.
- Standard hour: this is defined as the quantity of work achievable at standard performance, expressed in terms of standard unit of work in a standard period of time.
- Variance accounting: this is an account that centres on future planning activities of an organization as compared with the historical activities, the activities being expressed in budgets, standard cost, standard selling price, standard profit margin and difference between those and the comparable actual results to be accounted to the management periodically and the responsibility centres, the analysis centring on the operating profit variance.
- Variance analysis: it is concerned with the section of variance accounting that relates to the analysis into constituent section and variances between planned and actual performance.
- Cost variance: this refers to the difference between the standard (planned) cost and the comparable actual and historical cost incurred during the specified time period.
- Controllable variance: it is a cost variance which can be identified as the primary responsibility of a specified person.
- Sales variance: this is the difference between the budgeted value of sales and the actual value of sales in a given period of time.
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