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PROJECT TOPIC AND MATERIAL ON THE IMPORTANCE OF MARGINAL COSTING TECHNIQUE IN PRICING DECISION IN A MANUFACTURING COMPANY (A CASE STUDY OF UNILEVER NIGERIA PLC)
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- Name: THE IMPORTANCE OF MARGINAL COSTING TECHNIQUE IN PRICING DECISION IN A MANUFACTURING COMPANY (A CASE STUDY OF UNILEVER NIGERIA PLC)
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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 efficacy of marginal costing as an essential tool for 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 effeteness and efficiency.
(b) Finding out any inherent deficiencies in its application.
(c) To determine the criteria for cost control and analysis.
(d) How product 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 question mare administered to management staff and few senior staff who have knowledge about the technique under application. More so, useful pieces of information were got from libraries. The collected data were classified, analysis and interpreted by tabular discussion and simple percentage analysis, and the hypothesis were tested by using the chi-square method form the analysis of data, the major findings were that:
UNILEVER NIG. PLC apply marginal costing technique in valuation of stock, cost planning are control,
(a) The company purposefully uses these techniques for the following reasons:
- Decision making
- Controlling of cost
- Fixing of prices
(b) UNILEVER NIG. PLC uses marginal costing because it is simple to operate.
(c) UNILEVER NIG. PLC used 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 recommendations were made.
- The organization should fund a way of ensuring that instrumentality is closely tied to productivity or output of the employee.
- Due to the difficulty associated with receipt of orders, the orders for basic raw materials should be made long in advance.
- Where there is a request for special order, marginal costing should be applied
- The company budgetary control system should be supported with the standard costing technique from effective control of materials and labour cost.Above all, I strongly believe that if recommendations and accepted and vigorously pursued the decision-making will meet the set organizational objectives.
TABLE OF CONTENTS
TITLE PAGE i
1.0 INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 1
1.2 STATEMENT OF THE PROBLEM 2
1.3 OBJECTIVE OF THE STUDY 2
1.4 SIGNIFICANCE OF THE STUDY 3
1.5 RESEARCH QUESTIONS 3
1.6 HYPOTHESIS OF THE STUDY 4
1.7 SCOPE AND LIMITATION OF THE STUDY 4
1.8 DEFINITION OF TERMS 5
1.9 HISTORICAL BACKGROUND OF THE STUDY 6
2.0 LITERATURE REVIEW 8
2.1 DECISION MAKING 8
2.2 MARGINAL COSTING 9
2.3 DIRECT COSTING 10
2.4 PRINCIPLE OF MARGINAL COSTING 10
2.5 FEATURES OF MARGINAL COSTING 11
2.6 ABSORPTION COSTING 12
2.7 DIFFERENTIALS COSTING 13
2.8 MARGINAL AND DIFFERENTIALS COSTING 13
2.9 ADVANTAGES OF MARGINAL COSTING 14
2.10 LIMITATION OF MARGINAL COSTING 14
2.11 COST VOLUME PROFIT ANALYSIS 15
2.12 MARGINAL COST EQUATIONS 16
3.0 RESEARCH METHODOLOGY 17
3.1 RESEARCH DESIGN 17
3.2 TYPES AND METHOD OF DATA COLLECTION 18
3.3 THE STUDY POPULATION 18
3.4 DATA COLLECTION 18
3.5 METHOD OF DATA ANALYSIS 19
3.6 VALIDITY TEST AND RELIABILITY OF THE STUDY 19
4.0 DATA ANALYSIS AND PRESENTATION OF RESULT 20
4.1 INTRODUCTION 20
4.2 PRESENTATION OF DATA 20
4.3 ANALYSIS OF RESPONSE 20
4.4 HYPOTHESIS TESTING 24
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION 31
5.1 SUMMARY 31
5.2 CONCLUSION 31
5.3 RECOMMENDATION 32
REFERENCES 33 QUESTIONNAIRE 34
1.1 BACKGROUND OF THE STUDY
One pronounced reality of the modern business management is the advanced state of competition and rivalry whereby only the fittest enterprise survives, management however, employs predicted cost which is put in a meaningful manner. Essentially, while making a decision between a number of alternatives, management is always more concerned with the cost and income, difference between alternatives rather than the absolute total themselves.
Due to wealth creation and the satisfaction of business motives, management continues to increase its shares, assets and generally its credit worthiness in the entire economy. This in turn requires an improvement in the quality of decisions. Therefore in order to respond effectively to the challenges of the times, Management requires good decision analysis which leads to this research work.
This research work is principally concerned with investigating into the principles and the application of marginal costing technique at Unilever Nigeria Plc. The study will principally examine:
- The criterion for analysis of costs into fixed and variable components
- How these costs are controlled
- How prices are determined employing the techniques.
- How decision making is aided under the technique.
An appraisal was necessary in order to determine efficiency and effectiveness of this management accounting technique. In carrying out this research work, data were gathered from questionnaire information and analysis of same, employing the percentage method to analyze the responses elicited from the respondents. Also, personal observation method was used coupled with relevant information from libraries.
1.2 STATEMENT OF THE PROBLEMS
Fixed costs are substantial and increasing proportion of costs in modern industry. Business organizations are therefore facing hard times as a result of the continual drop in profits arising from the arbitrary allocation of costs to products and cost centre.
This arbitrariness in the allocation of cost has given rise to high cost of production, high cost of products and low turnover rate. In the light of this the future of business organizations in Nigeria is bleak.
The pertinent issue therefore, is the planning and controlling of costs through an efficient cost planning and reduction method. This study therefore tried to proffer answers to the following questions.
- Can marginal costing reduce the arbitrary allocation of production cost?
- With the technique of marginal costing, can production not be increased without increasing the amount of fixed cost?
- When management is faced with decision about two alternatives, is marginal costing the useful tool to use to select or choose the alternative that is better?
1.3 OBJECTIVES OF THE STUDY
The marginal costing technique is the one that differentiates costs clearly into fixed and variable elements. Bearing this in mind, the objectives of this study inter-alia, include:
- Evaluating the marginal costing technique in order to ascertain effectiveness and equally its efficiency.
- To determine the criterion for cost control and analysis
- To generally examine how product decisions are made by management under the technique.
1.4 SIGNIFICANCE OF THE STUDY
One established fact is that any technique of costing that a profit oriented business organization decided to adopt must be related to profitability. In view of the above fact, any effort that is therefore geared towards establishing how the technique helps in the realization of the profit of the organization will be worthwhile.
Since this has a reciprocal effect, any suggestion towards the improvement of the costing technique should at least, have a modicum of bearing one the improvement of profit. If productivity is to be enhanced considerably and the satisfactory of profit guaranteed, therefore knowledge of cost behavior and equally the analysis is completely necessary. The researcher believes that based on the findings of this very study and the proffered suggestions that the management of the Unilever Nigeria Plc in particularly, if it attaches strong importance to the suggestions that they will go a long way toward enhancing their profit position. The manufacturing industries will equally benefit from the findings of the study.
It is equally hoped that future researcher of this subject matter will find this project work important towards carrying out their respective research works.
1.5 RESEARCH QUESTIONS
- Is there any positive and significant relationship between marginal costing techniques and decision making?
- Can involvement of junior staff in decision making process enhance the success of manufacturing firms?
- Can quality of information provided by management has significant impact on the effectiveness of management accounting techniques?
- Is there any relationship between the quality of accountant’s information and the success of manufacturing firms?
1.6 HYPOTHESES OF THE STUDY
In order to get a classical analysis of the study, the following hypotheses are hereby proposed for this research work.
Ho: The principles of marginal costing do not aid prudent management decision making
Hi: The principles of marginal costing aids prudent management decision making
Ho: There is no relationship between marginal costing and decision making
Hi: There is relationship between marginal costing and decision making
Ho: The principles of marginal costing do not affect management decision making
Hi: The principles of marginal costing affect management decision making
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study is limited to the survey of how a marginal costing technique is generally operated at the Unilever Nigeria Plc, and how effective and efficient the technique is to the company. However, this very investigation should not be taken as being diametrically exhaustive. It is just a drop in the ocean because the information that was available to the researcher was very much limited. Due to the limited nature of the information that is available, this research cannot be considered as an end to itself, rather as a means to an end.
The constraint stemmed from the obvious fact that Unilever Staff are very strict in divulging all the information that was required.
In carrying out a research of this nature, adequate time is needed to do enough justice to the study; however, the time allocated to the study was insufficient to facilitate thorough investigation on the study and subject matter.
1.8 DEFINITION OF TERMS
Manufacturing industry: A manufacturing industry is one that acquires raw materials and intermediate goods and transforms them to finished goods through an industrial process.
Marginal cost: The marginal cost of a product is alternatively known as its variable cost which includes direct materials, direct labour, direct expenses and equally the variable parts of the overheads.
Marginal Costing: Marginal Costing may be defined as “the ascertainment by differentiating between fixed cost and variable cost, of marginal cost and of the effect on profit of changes in volume or type of output.”
Fixed cost: Fixed cost are cost which remain fixed over a given range of a productive activity and also for a given time period. They are therefore period costs since they relate to a given time period.
Contribution margin: Contribution margin is simply the difference between sales and the marginal or variable cost of a product.
Management: These are combination of board of directors, general managers, functional managers and divisional managers who control the affairs of an organization.
Information: They are processed data or facts.
Techniques: These are methods used to create efficiency in carrying out management accounting responsibilities.
Decision: This is a choice alternative
Manufacturing Companies: These are companies that undertake the production of goods and specialize on large scale by machinery.
Profit: This refers to investment (an investment is the capital committed to something which is hoped will bring in some returns of benefits).
Interpolation: The process of finding odd rates of return that does not appear in published interest tables.
Contribution: The difference between sales income and variable cost.
1.9 HISTORICAL BACKGROUND OF THE CASE STUDY
Unilever Nigeria Plc, was described as the pioneer is soap making industry in the century, it was establish and incorporated on 11th of April, 1923. The corporate mission, which is to add vitality to life, is the very best heart of Unilever, they seek to ensure that when people choose their brands they are choosing vitality. The journey of achieving this began in the 19th century.
Unilever Nigeria Plc, was incorporated as level brothers (West Africa) Ltd on 11th of April 1923, by Lord Lever Hulme, but the company’s antecedents have to be traced back to his existing trading interest in Nigeria and West Africa generally, and to the fact that he had since the 19th century been greatly involved with the soap business in Britain. Unilever Nigeria Plc started as a soap manufacturing company, and is today one of the oldest surviving manufacturing organization in Nigeria.
After series of merger/acquisition, the company diversified into manufacturing and marketing of food, non soapy detergent and personal care products. These acquisition brought in Lipton Nigeria Ltd in 1985, cheese brought ponds industries Ltd in 1988. The company changed its name to Unlived Nigeria Plc in 2001.Unliever Nigeria Plc is a public liability company quoted in Nigeria stock exchange since 1973 with Nigeria currently having 49% of equity holdings.
The long term success of this business stems from the strong relationship with the consumers based on the deep roots in the local culture and markets, creating more products that help them to ‘’feel good, look good and get more out of life’ and the total commitment to exceptional standards of corporate behavior towards their employers, consumers, communities and operating environment.
The brands are household futurities and this is because they are so deeply committed to meet the everyday needs of people everywhere in Nigeria their deep roots here combined with international experience and support, enable then to consistently develop brands, which raise the quality of life. It is therefore no surprise that one would find that all over Nigeria, people are at home with their brands.
Unilever as a company has embarked on a progamme of restructuring in a bid to re-energize itself, code – named the journey to Greatness: the vision is re-inventing them so that they can deliver fully on their promises to their consumers, customers and investors.
In addition, the company has sharpened its focus by introducing the vitality mission, which stands to ensure that in all they do, they are adding vitality to life for everyone.
Over the years, Unilever Nigeria Plc has been a socially responsible and responsive organization that takes strategic actions for the improvement of the communities and environment in which it operates.