This research work was undertaken to assess the concept
and application of marginal costing techniques in management decision making reference
to Nestle Food Plc. This work was intended to achieve
the following objectives: Showing the importance of marginal
costing as a tool for planning and short term decision making and
to ascertaining the format to be used on presenting marginal
costing information by management accountants
to the management. Relevant data were collected from
both primary and secondary sources. Questionnaire was the main primary data
collected instrument employed while data from various relevant publications
constituted the sources of secondary data. Upon the analysis of data the (SPSS)
along with percentage mean item was used to analyze the questionnaires while
ANOVA was used to test the hypothesis. The study established that the marginal
costing technique is the key aspects of the Accountant’s job. The management
Accountant ascertain whether the technique contributes to high quality decision
making which will help him in reporting on magical casting techniques to
Nigerian Nestle Food Plc, and the extent to which reliance can be placed on the
technique. The overall objective of any organization is to maximize profit and
hence increase in wealth of its shareholders. Based on the finding and
conclusion arrived, it recommend that practicing management accountant should identify
relevant cost and provide information to management on the effect of costs and
revenues of charges in volume of output in the short run and Fixed cost should
not be absorbed into product cost along with variable cost rather they should
be treat as period cost which are simply charged to profit with fixed selling
and administrative cost during that period by the management.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
CHAPTER ONE: INTRODUCTION
Background of the Study 1
Purpose of Study 4
Research Questions 4
Statement of Hypothesis 5
Significance of Study 6
Organization of the Study 7
Limitation and Scope of Study 7
Definition of Terms 8
CHAPTER TWO: LITERATURE
Application of Marginal Costing – Make or Buy
Cost Behaviour 24
The Treatment of Fixed Costs 28
Marginal Costing Techniques Versus Absorption
Application of Marginal Costing Techniques 33
Decision Making with Limiting Factors And
Product Mix 35
Benefits of Marginal Costing 36
Problems of Marginal Costing 37
Literature Based on Each Relevant Variable,
Model and Theory 38
Concept of Cost Accountancy 40
Background of Nestle Nigeria Plc 58
CHAPTER THREE: RESEARCH
Research Design 63
Re-Statement of Research Questions 64
Re-Statement of Research Hypotheses 64
Population of the Study 65
Sample and Sampling Technique 65
Research Instruments 66
Methods of Data Collection 67
Analytical Tools 67
of Instrument 68
of Instrument 68
CHAPTER FOUR: DATA PRESENTATION
Analysis and Interpretation of Data 69
Testing of Hypotheses and Interpretation 83
Discussion of Tested Hypotheses 85
CHAPTER FIVE: SUMMARY,
Suggestion for Further Studies 89
1.1 BACKGROUND OF THE STUDY
One of the most important things in
life of a business is decision making. Decision making is an all pervasive
activity taking place at every level in the organization, covering both the
short and long term. It is concerned with the future and involves a choice
between alternatives. The decision making of a business is centered upon the
information possessed by the decision maker.
However, plans are activated by decisions which require some of financial or
qualitative analysis in order to make a rational choice. It is because of this
that the practicing management Accountant is heavily engaged in producing
relevant information for decision making purpose. The overall objective of a
business enterprise is to make profit and as such, the decision on which method
of reporting profit to be used at any given time is a very crucial management
In traditional costing, there is a very
crucial and two basic method of reporting profits. The emphasis in this
research will, however, be on the importance of marginal costing techniques in
the decision making process. These are:
Absorption costing/ full
Marginal costing period costing/direct costing
The practice of charging all costs both
variable and fixed to operations, products or processes is termed as absorption
The practice of charging all direct
costs to operations, processes or products and leaving all indirect costs to be
written off against profits in the period in which they arise is termed as
direct costing. The technique differs from marginal costing because some fixed
costs can be considered as direct costs in appropriate circumstances.
According to Browning, 2OOO) Marginal
costing is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of
production, e.g., materials, labor, direct expenses and variable overheads.
Fixed overheads are excluded in cases where production varies because it may
give misleading results. The technique is useful in manufacturing industries
with varying levels of output. The features which distinguish marginal costing
from absorption costing are as follows.
absorption costing, items of stock are coasted to include a ‘fair share’ of
fixed production overhead, whereas in marginal costing, stocks are valued at
variable production cost only. The value of closing stock will be higher in
absorption costing than in marginal costing.
a consequence of carrying forward an element of fixed production overheads in
closing stock values, the cost of sales used to determine profit in absorption
Include some fixed
production overhead costs incurred in a previous period but carried forward
into opening stock values of the current period;
Exclude some fixed
production overhead costs incurred in the current period by including them in
closing stock values.
In contrast marginal costing charges the actual fixed costs of a period in full
into the profit and loss account of the period. (Marginal costing is therefore
sometimes known as period costing.)
absorption costing, ‘actual’ fully absorbed unit costs are reduced by producing
in greater quantities, whereas in marginal costing, unit variable costs are
unaffected by the volume of production (that is, provided that variable costs
per unit remain unaltered at the changed level of production activity). Profit
per unit in any period can be affected by the actual volume of production in
absorption costing; this is not the case in marginal costing.
marginal costing, the identification of variable costs and of contribution
enables management to use cost information more easily for decision-making
purposes (such as in budget decision making). It is easy to decide by how much
contribution (and therefore profit) will be affected by changes in sales
volume. (Profit would be unaffected by changes in production volume).
1.2 PURPOSE OF STUDY
The purpose of this research work is to
evaluate and critically examine marginal costing technique as an important tool
for making managerial decisions. The objectives will include;
Showing the importance of
marginal costing as a tool for planning and short term decision making.
Ascertaining the format
to be used on presenting marginal costing information by management Accountants
to the management.
Evaluating the extent to
which marginal costing can be used for pricing method.
marginal costing has helped the management to achieve high profitability level.
Ascertaining the relevant
costs to be used in marginal costing computation
effectively preferred is marginal costing techniques to absorption costing
techniques in an organization
what extent has marginal costing techniques contributed to decision making in
strict adherence to marginal costing technique enhance profitability level and
growth of an organization?
marginal costing techniques serves as a tool for planning and short term
1.4 STATEMENT OF HYPOTHESIS
following hypotheses are considered as the basis for the questions set for this
Marginal costing technique is not the best technique for decision making
compared to Absorption costing techniques
Marginal costing technique is the best technique for decision making compared
to Absorption costing techniques
Strict adherence to marginal costing technique does not enhance profitability
level and growth of an organization compared to strict adherence to Absorption
Strict adherence to marginal costing technique enhance profitability level and
growth of an organization compared to strict adherence to Absorption costing
Marginal costing techniques does not serve as a tool for
planning and short term decisions compared to absorption costing techniques.
Marginal costing techniques serves as a tool for planning and short term
decisions compared to absorption costing techniques.
1.5 SIGNIFICANCE OF STUDY
The study is expected to be of
tremendous help to students and managers in production sector of the economy.
At the end of the study, it would be clearly understood and appreciated that
marginal costing is a useful technique if used with care and adopted to meet
the diverse conditions which apply in a real life environment.
The accounting terms and management,
after this research work will now see to the fact that a good system of
marginal costing techniques is necessary. This will help to reduce the work
done by management and make job less complex and cumbersome.
This study will advance the use of n costing technique as a good system of
marginal costing technique is necessary tool to be used on making decision from
the bondage of financial troubles woes. At the end of the study would be
appreciated, how and why marginal costing can be an important and necessary aid
to decision making.
In conclusion, the research study will
be useful to Auditors, management of companies, research institutions,
professional studies and general public.
1.6 ORGANIZATION OF THE STUDY
This research work will be five (5)
chapters for easy comprehension and proper organization. Chapter one will
consist of the introduction, statement of problem, research questions, research
hypothesis, purpose, scope and limitation of the study, significance of the
study, organization, definition of terms of study. Basically, it gives an
insight into what the project work is all about. Chapter two reviews relevant
literature and the theoretical frame work on the subject matter, and chapter
three states the methodology in which the research work is based on. Chapter
four states the data analysis and interpretations and highlights the view of
respondent on the subject matter. Chapter five state the summary, conclusion
and recommendations of the research topic and with references.
1.7 LIMITATION AND SCOPE OF STUDY
This study could have been extended to
cover as many companies in order to allow for more representations but due to
time and financial constraints this study will be limited to the activities for
Nestle Food Plc. The scope of this study will
focus on the concept and application of marginal costing technique in Nestle
Food Plc from 2001—2005 years of their financial statement.
DEFINITION OF TERMS
Marginal Costing: This
is a decision making technique used to determine the effect of cost on changes
in the volume of time and output in a multi product firm especially in the
short run. It treats direct costs and variable factory over head as product cot
while treating all the fixed overheads as period cost.
Absorption Costing: This is technique which absorbs fixed overhead into period
cost through the use of a pre-determine overhead absorption rate which is Get
annually after budgeted overhead are allocated to cost centres.
Making: This is the process of selecting among
alternatives coursed of action. It is the cost stage of planning process.
Management Accounting: This is
deflie as the application of professional knowledge and skill in the
preparation of accounting information in order to as management in formulation
of policies and in planning and control
is the resource sacrificed or foregone to achieve a specific objective. It is
usually measured as the monetary amount that must be paid to acquire goods and
Direct Costs: Are
related to the particular cost object arid can be traced to it in an
economically feasible way.
Indirect Costs: Can
be described as the cost incurred for a period which certain output and
turnover limits, tend to be unaffected by fluctuations in the levels of
Variables Costs: Items
of which tends to vary in direct proportion to changes in the volume of output
of the cost center to which they relate.
Overheads: Refer to any cost which is
not directly attributable to a cost unit. In other overhead Is the total of
Indirect material cost, indirect labour cost and indirect expenses.
Break Even Analysis: This is the term given to the study of
interrelationship among costs. Volume and profits at variables levels of
activity. At break even point, neither profit nor loss is made.
Contribution: This is the difference between the sales and costs of product in
a given period of time.
Adernugiwa M.A 20O3): Accounting
Managers Today, Ayomi Publications, Nigeria.
Ballard, Charles & Fullerton, Don,
(1992) “Distortioriary Taxes and the Provision of Public Goods”, Journal of
Economic Perspectives, 117-31
Browning, Edgar, (2000) “The Marginal
Cost of Public Funds”, Jour
Campbell, Harry, (2002) “Deadweight
Loss and Commodity Taxation in Canada”, Canadian Journal of Economics,
Marginal Costing & Absorption
Costing (2005) Retrieved from htt/ /www/globusz.com/ebooks/consting000000 12