Abstract
This study
examined the accounting treatment of joint product and its effects on
profitability with particular reference to Bendel Brewery Limited. This study
was carried out to investigate whether problems of joint cost, allocation of
joint products, existed in manufacturing companies, with Bendel Brewery Limited
as a case study, if it was established that the problem existed, the research was
also aimed at identifying the causes of decisions and attempts so far made by
the company to solve the problems facing joint cost allocation in the
manufacturing companies. In carrying out is investigation a research, questionnaire
was drawn up. Information necessary to address the problems, where gathered,
collected, analyzed and summarized around each research questions. From the
available data analyze, it was indicated that the problems and that the
problems, has some effects in this study indicated that no progress has been
made towards solving these problems of
joint cost allocation in Bendel Brewery Limited and other firms in the Brewery
industry. However, some recommendations were made to assist the company in
solving the problems.
TABLE OF CONTENTS
Title
Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table
of Contents vii
Chapter One: Introduction 1
1.1
Background to the Study 1
1.2
Statement of Problem 4
1.3
Research Questions 4
1.4
Objectives of the Study 5
1.5
Statement of Hypotheses 6
1.6
Significance of the Study 8
1.7
Scope of the Study 9
1.8
Limitations of the Study 10
1.9
Definitions of Terms 11
Chapter Two: Review
of Related Literature 14
2.1
Introduction 14
2.2
Methods
of Apportioning Joint Costs
to
Products 16
2.3
Why Allocating Joint Costs in a
Manufacturing
Sector 23
2.4
Approaches to Allocating Joint Cost to
Product 24
2.5
Joint Products – Sell or Process Further 25
2.6
Joint Products to Service Organization 27
2.7
The Concept of Cost Allocation and
Costing
System 28
2.8
Cost Apportionment and Decision Making 29
2.9
Criteria for Cost Allocation Decision 31
2.10 Joint
Cost Allocation and Company’s
Profitability 33
2.11 Accounting
for Product Costing and
Income
Measurement 36
2.12 Decision
on product profitability 52
2.13 Pricing
decision of products 57
2.14 Inter
divisional inter company transfer 58
2.15 Concept
of by-produce costing 59
2.16 Treatment
of bye-products and joint
products
costing 62
2.17 Income
tax law and the costing of joint
Product
2.18 Organizational
structure of Bendel Brewery Ltd 66
2.19 Production
process 68
2.20 Department
under production 69
Chapter Three: Research
Method and Design
3.1
Introduction 72
3.2
Research Design 72
3.3
Description of Population of the Study 73
3.4
Sample Size 74
3.5
Sampling Technique 74
3.6
Sources of Data Collection 74
3.7
Method of Data Presentation 75
3.8
Method of Data Analysis 79
Chapter Four: Data
Presentation, Analysis
and
Interpretation
4.1
Introduction 77
4.2
Presentation of Data 77
4.3
Data Analysis 77
4.4
Hypothesis Testing 96
Chapter Five: Summary
of Findings, Conclusion
and
Recommendations
5.1
Introduction 109
5.2
Summary of Findings 109
5.3
Conclusion 112
5.4
Recommendations 113
References
117
Appendix
119
Questionnaires 120
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
A lot
of industries concerns are often confronted with the difficult and complicated
problems of allocating costs to their joint product, which obviously is an
inescapable problem in nearly every organization and in nearly every fact
accounting for product costing purposes. The major problem in joint costing is apportioned
the joint costs, i. e those prior to the split-off point, on an acceptable,
basis.
Okolie (2005) the following are the
methods of apportioning, joint costs.
a. Physical
Quantity Basis: The Joint cost is apportioned, according to the quantity of
the products. This may be in terms of units, volume, weight, etc.
b.
Sales Value: This
sales value at the split-off point is used to apportion the cost.
c. Notional Sales Value:
This arises as a result of the joint products not having market value at
split-off points, because they need to be processed further.
Because joint products arise due to the
inherent, nature of the production process, it follows that none of the
products can be produced separately. The various products become identifiable
at a point known as the “split-off point”. Up to that stage all costs are joint
costs, subsequent to the split-off point any costs incurred can be identified
with specific, products and they are known as “subsequent” or additional
processing costs”
Joint cost allocations are used for four
essential purposes in allocating cost to their joint products.
They are stated as follows:
i.
To provide information for economic
decisions
ii.
To motivate manager and other employers
iii.
To justify cost or compete reimbursement
iv.
To measure income and assets for reporting
to external parties, etc.
Management apart from comparing the
performance of individuals units within the organization finds it useful to
compare the performance of individual, products, and the extent to which each
product contributes to the entire profitability of the organizational, goals or
objectives which is the primary aim of every organization and for decision making.
Techniques such as profitability
measures and returns on investment require costs and revenue to be assigned to
divisions and products and therefore the need for an appropriate method of
allocation joint costs to products. According to Horngren T Foster, G &
Datar, M. (2001:538) Two basic methods are used to allocate joint costs.
Method One:
Allocate costs using market based data such as revenues; this method
illustrates three methods that use this approach.
Ø Sales
value at split-off method
Ø Estimated
net realizable value (NRV) method.
Ø Constant
gross-margin percentage (NRV) method.
Method Two:
Allocate costs using physical measure, based data such as weight or value.
1.2 Statement of Problem
The study is concerned with the
accounting treatment, of joint product, costs and its effect on profitability
given the various methods of allocating joint cost and insufficiency of data in
the use of some of those methods. The research therefore wants to appraise the
justification for the choice of the method used in allocating joint products
cost in the Brewery industry.
1.3 Research
Questions
The following are some of the research
questions:
i.
Is there a problem of allocating joint
cost to product in the industry?
ii.
What are the likely causes of the
problems?
iii.
What are the effects of those problems on
the company’s profitability?
iv.
What criteria might be used to guide
cost allocation decision?
v.
What are the basic methods used for the
selection of the methods of allocating joint costs to products in the industry?
vi.
Should joint-cost be apartment why?
1.4 Objectives of the Study
“Bendel Brewery Limited” is a growing
company in the brewery industry. Given the importance of cost analysis is
management decision and its effects on profit ability, in a company producing
joint products in basic objective of the study, therefore includes the
following.
i.
To investigate whether there is a
problem of allocating joint costs to products in the brewery industry;
ii.
To be able to determine the cost of
allocating joint products in the brewery industry;
iii.
To allocate cost per unit of usage and
to promote effective resource usage in the industry;
iv.
To provide information for economic
decision
v.
To faster cost awareness and to identify
also causes of the problem of allocating joint cost to products to the
industry.
vi.
Apportioning the joint costs effectively
so as to increase the profitability of the business.
vii.
To reduce cost of production, etc.
1.5 Statement of Hypotheses
This part of the research work would
have some corrections with the statement of the research problem. Research
hypothesis is a testable statement regarding, the relationship between two or
more variable that are inductive reasoning is based on incomplete knowledge of
facts of the instruction of person whims (Aigbokhaevbolo & Ofanso, 2002:23-24).
The following hypotheses are stated to obtained answers to the study’s research
questions. They are the test of hypothesis under alternative “Hi: and Null “Ho”
Hypothesis One
Ho: Joint products are not separated during the
course of processing
HI: Joint products are
usually separated during the course of processing
Hypothesis Two
Ho:
The problem of allocating joint product
costs does not have any positive effects on the company’s profitability.
HI:
The problems of allocating joint
product costs have any positive effects on the profitability of company.
Hypothesis
Three
Ho:
Joint products need not be apportioned
for income measurement purposes.
Hi:
Joint product should be apportioned for income
measurement purposes.
1.6 Significance of the Study
The relevance of this study is to
examine how joint product costs and cost-allocation decisions have effects in a
company’s profitability as an important tool for management decision making in
Bendel Brewery Limited, Benin City.
The result of this study will not only
be of great value to the staff and management of Bendel Brewery Limited, but
also to other staff and management of the entire Brewery Industry. It also
seeks to highlight the importance of effective cost-allocation of joint product
costs and management of finance in other breweries.
This project work would also be relevant
to small and large scale business ventures as it will help in the prudent
management of the allocation resources and also for students who are
interested, they will be equipped more on the understanding of joint product
costs and cost-allocation in the brewery industry.
Also, management of any other business
organization outside the industry and other research work are very useful to
their field of study.
Finally, the findings and recommendations
of this study will be of immense benefits to the brewery industry at large.
1.7 Scope of the Study
This research work was carried out in
the year 2005; it is deemed to have covered the company’s affairs from 2005 to
date regarding the treatment of joint product costs and its effects on
profitability, using Bendel Limited, Benin — City as a case study.
The scope of this research work also
covers the following areas of joint product cost: Cost allocation and costing
system, methods of apportioning joint costs, joint cost allocation in the oil
patch and income measurement etc.
A detailed analysis of the company’s
strengths weakness, opportunities and threat (SWOT) will be undertaken.
Operational data about the company will be collected and analyzed.
1.8 Limitation of the Study
It is necessary to highlight some of the
hindrance encountered in the course of carrying out this research work. These
include.
i. Insufficient
time used using the research process by the researcher due to short semester
period and creating time for the execution of school assignment within the
specific time given out to carry out the research work.
ii. Inability
of the researcher to get reference materials in form of textbooks, journals and
information boarding by management of the company.
Inspite of these constraints, the
researcher has to remark that the study has a good degree of validity.
1.9 Definition of Terms
There
are dependent and independent variables that will be used in this study. The
understanding of these relevant terms is very important; others will be
explained in subsequent chapters. They include the following:
Joint
Products: This is the term used when two or more products
arise simultaneously in the course of processing each of which has a
significant sales value in relation to each other.
By-Products:
Is
a product which arises incidentally in the production of the main product(s)
and which has a relatively small sales value compared with the main product(s).
Joint
Costs: These are the cost of a single production, process
that yields multiple products simultaneously
Split-off
Point: The juncture of manufacturing where the joint
products become individually identifiable.
Separable
Costs: Any costs beyond the split off point.
Sunk
Cost: A cost
that has already been incurred and therefore, is irrelevant to the decision
making process.
Main
Product: When a joint production process yields only one
product with a relatively high sales value
A
Product: This refers to an output that has a positive net sales value or
an output that enables an organization to avoid incurring costs.
Profitability Ratio: These
measure management overall effectiveness as shown by the returns generated or
sales and investment.
Incremental
Cost: This is the cost incurred on a joint product after
the split-off point as a result of further processing.
Incremental
Revenue: This is the added revenue derived as a result of
processing a joint product further after its split-off point.
Cost
Allocation: This can be defined as: “To assign a
whole item of cost, or of revenue, to a single cost unit, centre, account or
time period”. (Lucey, 2004:12)
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