EFFECTS OF STANDARD COSTING ON THE PROFITABILITY OF MANUFACTURING COMPANIES

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

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) defines standard costing as a technique which establishes pre determined cost estimates of the cost of products and services and then compares these pre determined costs with actual costs as they incurred. Standard cost represent am estimated or pre determines total cost of product per unit for an organization. Adeniji (2009) argues 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 overwhelming the record keeping system in the use at that time. 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 the 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 and 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 to measure the destining economic situation. Among the measures taken to revamp the economy includes;

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 applicable 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 pay pocket 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 reason, 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 up, more problems still come up from such areas like;

  1. Irregular supply of water: The power holding company of Nigeria (PHCN) does not render adequate services to manufacturers. PHCN will take off power and the production would stop unscheduled thereby resulting to much damages which the costs are added to cover all productions.
  2. Inadequate supply of water: water is always in short supply and in most cases, water board does not supply water manufacturers need it. The manufacturers resort to buy water needed for their production from the open market to see the manufacturing activities are going on. In this respect, the price of getting water is costlier than from water board in most cases, whether water is supplied or not, water board will require them to pay a reasonably monthly water rate.
  3. Bad roads: in respect of transporting raw materials used from the extraction area and evacuation of finished goods from the manufacturing industry to the market where it is demanded, hightransport costs are made due to bad roads in Nigeria with special reference to Eke, Udi LGA of Enugu state in particular.
  1. Foreign competition: most of the indigenous manufacturers are not given protection from foreign competitors and in most cases are deprived of tax holidays.

There has been decreased profitability resulting from increased costs. In effect, requires a greater cost reduction and profit optimization. This can only be achieved through setting reliable standards, ensuring that such standards are mentioned and variances not adversely very large (significant) without proper cause. The system helps cost reduction to increase profitability. Another major problem centers on lack of adequate control of scarce resources by indigenous manufacturers. Most of the resources used require special storage facilities where they are stored before they are utilized to avoid spoilage. In most cases, the storage facilities might be beyond the reach of some manufacturers. Along the line, most manufacturers do not have adequate control over the resources as they are easily impact on the government. Government policies may be favorable or unfavorable to manufacturers in Nigeria; they can be evidenced to restriction an total ban as most of them are being imported.

The use of unqualified and inexperienced accountants by some industries pose a greater problems to such industries for the accountant cannot adequately apply the accounting techniques required of them on standard costing.

1.3 OBJECTIVES OF THE STUDY

While carrying out this research, the following aspects were borne in mind;

  1. To discover if the application of standard costing techniques have any effect on the profitability of manufacturing companies.
  2. To explore the relationship between standard costing and profitability in manufacturing companies in Nigeria.
  3. To determine whether standard costing techniques and principles are being adopted and practiced in Nigerian manufacturing industries.

1.4 RESEARCH QUESTIONS

  1. Does the application of standard costing techniques have any effect on the profitability of manufacturing companies.
  1. What are the relationship between standard costing and profitability in manufacturing companies in Nigeria?
  2. Are the principles of standard costing and standard costing techniques being adopted and practiced in Nigeria?

1.5 HYPOTHESIS OF THE STUDY

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 three hypotheses that will be tested in the process of this study. They are as follows;

  1. H0: The application of standard costing techniques has no effect on the profitability of manufacturing companies in Nigeria.

H1: The application of standard costing has effect on the profitability of manufacturing companies in Nigeria.

  1. H0: There is no relationship between standard costing and profitability in manufacturing companies in Nigeria.

H1: There is a relationship between standard costing and profitability in manufacturing companies in Nigeria.

  1. H0: The principle of standard costing and the standard costing technique are not being adopted and practiced in Nigerian manufacturing companies.

H1: The principle of standard costing and the standard costing technique are being adopted and practiced in Nigerian manufacturing industries.

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, one of the early British industrialist should be released on. Appleby regards 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 any cranny of the 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. There is a limit to the price charged to production.

In effect, cost should be given maximum attention since revenue less cost gives a balance of profit. Profit should be increased as it is every industry is aiming at.

1.7 SCOPE AND LIMITATION OF THE STUDY

This research project is restricted to the manufacturing industries of Nigerian breweries plc. The researcher focused on the Ama Brewery located at Eke, udi local government area of Enugu state as this industry operates under similar conditions as its counterparts within Nigeria an will present similar problems.

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries of Nigeria brewery plc at every location, therefore, this study was limited to Ama brewery, Eke, Enugu state.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. 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 of some staff(s). Some of the staff(s) of the company taken into consideration refused to be interviewed for the fear of official reprisal, if they give out some committed information. This made it difficult for the researcher to collect much primary information.

1.8 DEFINITION OF TERMS

The concept of standard costing as predetermined or forecast estimates of cost is wide and varied. The terms used in this research work intend to have the same understanding with the definition of the standard cost by the institute of cost and management accounting (ICMA) as “the predetermined cost calculated in relation to the prescribed set of working condition. Co-relating technical specification and scientific measurements of materials, labor and wage rate expected to apply within the period which the standard relates within an addition of appropriate share of budgeted overhead. Its main purpose is to provide basis for control through variance accounting for the valuation of stock and work in progress, and exceptional cases for fixing selling prices. Some of the words used in this research project are defined as follows;

  • Standard costing: implies setting up standard costs for goods and services.
  • Standards an budgets: both standards and budgets are concerned with setting performance and cost levels for control purposes.
  • Costing standards: meaningful standards which can be used for control purposes rest on a foundation of properly and standardized methods and procedures and comprehensive information system.
  • Material standards: this implies setting the material content of a product.
  • Labor standard: implies predetermining the exact grades of labor to be used as well the times involved. Planned labor 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 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 centers 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 centers, the analysis centering 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.
  • Profit and loss variance: this is the difference between the planned profit and actual profit and loss.
  • Profitability: this means the ability to make profit from all business activities of an organization, firm, company or an enterprise.
  • Profit: this refers to the total income earned by the enterprise during the specified period of time

REFERENCES

Adeniji, A. (2009). Cost accounting: A managerial approach. Lagos: El-toda

Ventures publishers limlited.

Lucey,T. (2002). Costing. New York: biddles limited, Guildford and king’s lynn.

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