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.
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
finding of the analysis carried out suggested that marginal costing is a vital
tool in the area of profit) planning and solid decision making.
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.
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
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
TWO: LITERATURE REVIEW
2.1.1 Stock Valuation and Operating Under Marginal
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
2.3 Cost Volume-Profit (C.V.P) Analysis; An
application of marginal Costing.
2.3.1 Approaches To Cost-Volume Profit Analysis
220.127.116.11 Equation/Mathematical Approach
18.104.22.168 Contribution Margin/Unit Approach
22.214.171.124 Contribution Margin for the Approach
126.96.36.199 Graphical Approach
2.3.3 Criticism and Limitation of Cost-Volume Profit
2.3.4 Importance and Application of Cost Volume Profit
THREE: RESEARCH METHODOLOGY
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
FOUR: ANALYSIS AND INTERPRETATION OF DATA
4.2 Regression Analysis
4.2.1 International Tobacco Company Plc; Manufacturing
Cost Progression Analysis
(a) International Tobacco Company Plc; Operating
Profit Progression Analysis
(b) 7up Bottling Company, Ilorin Operating Profit
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
FIVE: SUMMARY, CONCLUSION AND POLICY RECOMMENDATION
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
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.
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.
to Management: Marginal
costing techniques cal also be used for both internal and external report to be
and middle management.
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.
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
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
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
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.
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
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:
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.
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
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.
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
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
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.
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
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
4. H1: That marginal costing technique is effective
as a managerial tool for profit planning and decision making in manufacturing
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
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.
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.
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:
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:
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.
Profit= Net Sales – Cost of Goods Sold
Net sales= Total sales- Good Returned Inwards
Cost of Goods Sold=Opening Stock+Purchase- Closing
NET PROFIT: It s the excess of revenue over the expenses incurred in earning that
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 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:
development of the basic technique used in the managerial cost approach
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
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.
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