ABSTRACT
This research work examines the importance of application of
marginal costing technique in a manufacturing company using Nestle
Nigeria Plc as a case study. It shows that application of marginal
costing technique is a survival tool in Nigeria present economic
situation.
It also shows that effective control of production and
distribution of operational cost arises from the intelligent application
of operational control, adequate cost accounting systems, analysis of
cost data and variances, formulation of product policies and using of
already established budgets.
In carrying out this research work, primary and secondary data
were used. The primary source of data was through questionnaires, which
was administered to the targeted staff. The secondary data method was
also used to collect information for this study and it involves engaging
in desk research with review of relevant textbooks, journals and
magazines
The research study revealed that application of marginal costing is a necessary tool for organization overall performance.
Based on the finding of this study, management should put
adequate measure in place to ensure compliance with standard, appreciate
the need for training of staff to improve their level of competence in
order to discharge their duties effectively and efficiently.
CHAPTER ONE
1.0 INTRODUCTION TO THE STUDY
This project is designed to evaluate the application of marginal
costing technique in a manufacturing company with special reference to
Nestle Nigeria Plc as a case study.
It therefore examines the techniques of marginal costing as a
tool of industrial survival in the Nigeria present economy. The project
will also examine cost control system of Nestle Nigeria Plc so as to
know whether or not a control system exists.
The effective control of production and distribution of
operational cost arises from the efficient application of operational
control, adequate cost accounting systems, analysis of cost data and
variances, formulation of product policies and using of already
established budgets.
Marginal costing techniques (MCT) will be ascertained in Nestle Nigeria Plc as related to:
1) Various methods of valuing material issues.
2) Labour remuneration.
3) Determination of marginal costing per unit of a product.
4) Purchasing procedures.
5) Store routine, store control and issue of material.
6) Ascertain actual cost per unit.
Marginal costing and its application
This is a well-known concept of economic theory. It may be described
as the change in total cost which arises as a result of an increase and
or decrease by one unit in volume of output. Marginal cost is an amount
at any given volume of output by which aggregate costs are changed if
the volume of output is increased or decreased by one unit.
Marginal cost is synonymous with variable costs, prime costs plus
variable overheads in the short run but, in a way, would also include
fixed cost in the planning production activities over a long period of
time involving an increase in the productive capacity of business.
Theoretically marginal cost and differential cost are the same. If there
is no change in fixed cost then both of these costs will be same. Thus
marginal cost does not include fixed cost at all whereas differential
cost may include an element of fixed cost as well if fixed cost changes
due to a decision.
Marginal costing is a very important technique of decision making. It
is a comparatively new area in the field of accounting but it is
gradually gaining more and more acceptance. It is the method of matching
cost with revenue to determine periodic income. It is the ascertainment
of marginal cost and of the effect on profit of changes in volume or
type of output by differentiating fixed costs and variable cost. In this
context it should be noted that it is not a system of costing like
process or job costing but it is simply an approach to the presentation
of accounting information meaningful to management. In this all cost are
segregated into fixed and variable components. Only the variable costs
are regarded as product cost and are used to value inventory and cost of
goods sold. The fixed costs are treated as period cost and are charged
directly to profit and loss account. Thus no part of fixed manufacturing
cost is deferred to the next period as inventory. While preparing a
profit and loss account on marginal costing basis, the variable or
marginal cost of sales is deducted from sales value and the difference
is termed as contribution margin.
The technique of marginal costing is a valuable aid to management in
taking various policy decisions. The following is one of the problems
where managerial costing analysis is useful:
Pricing of products: product pricing is usually considered to be a
difficult problem, particularly in non-repetitive production. The
problem is to equate the demand and supply in such cases marginal
costing is very helpful. This technique can help management in fixing
prices in such circumstances:
(a) A trade depression in industry
(b) Dumping
(c) A seasonal fluctuations.
1.1 HISTORICAL BACKGROUND OF NESTLE NIGERIA PLC
Nestle Nigeria Plc is a member of the respected and trustworthy
nutrition; health and wellness company renowned world-wide for its top
and high quality products. The company commenced simple trading
operations in Nigeria in 1961 and has today grown into a leading food
manufacturing and marketing company. Nestle was listed on the Nigerian
Stock exchange on April 20, 1979. Nestle S.A of Switzerland and Nestle
CWA Ltd, Ghana are the major shareholders of the company, controlling
31.17% and 59.13% of the company respectively.
RAW MATERIAL SOURCING
Nestle Nigeria procures some of its raw materials such as corn
grains, Soya beans, cocoa powder and sorghum locally from farmers
through contractual and partnering arrangement that enables them
benefits from the technical advice and assistance of the company
continuous supply of raw materials that meet its high quality standards.
Nestle also imports some of its raw materials which include Monosodium
Glutamate, Milk Skimmed Powder, Full Cream Milk powder & Salt
through Suppliers. The company's objective is to satisfy the
requirements of consumers with high quality food products by ensuring
safety and quality of its product from raw materials till the finished
products get to the final consumer. The suppliers are also aware of this
objective and they ensure compliance with all Nestle Food Safety
Standards.
CORPORATE HEAD OFFICE
The Corporate Head Office is situated at Ilupeju Industrial Avenue,
Lagos. This is the administrative office where customer servicing,
demand and supply planning and vendors payment takes place. Other
departments in Head Office include Human Resources, Finance and Control,
Import and Export, Purchasing and Sales.
MANUFACTURING
The manufacturing complex is located at Agbara Industrial Estate, in
Ogun State. The main production units were designed in line with modem
manufacturing methods which ensure efficient production of the following
products: Nutrend, Cerelac maize, Cerelac Wheat, Milo, Maggi varieties,
Chocomilo and Golden Mom. Nestle Nigeria also imports some of its
finished products which include Nescafe, NAN, Nido Milk etc.
Nestle Nigeria recently commissioned a new manufacturing complex
known as Flower gate factory which is located in Shagamu, Ogun State.
This new manufacturing complex will further strengthen Nestle Nigeria's
role as the largest culinary manufacturing operation on the African
continent. Spread over an area of 36.3 hectares, the new 12-hectare
facility specializes in the production of Maggi products and more
specifically in Popularly Positioned Products (PPP) varieties of this
popular brand. Nestle's PPPs are products adapted to meet the specific
requirements of emerging consumers in terms of price, accessibility,
format, and nutritional benefits and they are a key driver for the
future growth of Nestle's operations in Nigeria. Many of the Maggi
products in Africa are iodine fortified to help combat iodine
deficiencies among the local population.
DISTRIBUTION FACILITIES
The Distribution Centre is located at Otta, in Ogun state. The
distribution system ensures the widest possible penetration into the
nation's markets at a Pan-Nigeria Price, which is the same for every
buyer anywhere in Nigeria. At the heart of the system is the
Distribution Centre, which occupies an eight-hectare in Otta Industrial
Estate.
HUMAN RESOURCES AND TRAINING POLICY
Nestle Nigeria currently has a total number of 2,216 employees.
Continuous attention is given to training and development of staff at
all levels to improve their technical competence and prepare them for
future challenges and career opportunities. In addition to internal
courses and seminars with the company, it also uses its training
facilities all over the world in collaboration with its technical
advisers, Netsuke Limited of Switzerland. Some managers are currently on
expatriation in other Nestle markets which include Switzerland, Ghana,
Cote d'Ivoire, United States of America, United Arab Emirates and
Australia under the Company's International Management Exchange
Programme. In line with its policy, Nestle Nigeria also awards Secondary
and tertiary education scholarships to deserving Children of its staff.
The scope and value of the awards are constantly reviewed and improved.
1.2 PURPOSE OF STUDY
The purpose of this study (research work) is to evaluate and examine
the various applications of Marginal Costing Techniques as a survival
tool in the Nigeria present economic situation. Some of the objectives
are summarized as follows:
i. To understand the meaning and principle on which marginal costing operates and the purpose for which it is used.
ii. To find a way of controlling cost in order to break even as well
as to help the cost accounting system of the industry to calculate cost
and value of stock accurately.
iii. To provide an appropriate basis for closing stock valuation and work in progress.
iv. To look into the existence and application of the basic principles of marginal costing techniques in Nestle Nigeria PIc.
v. To ascertain the relationship between costs incurred
in the production process to the level of activities and the revenue
generated for effective management decision.
1.3 SIGNIFICANCE OF THE STUDY
This refers to the importance and benefits of the project work to the
manufacturing organization and to the Nigeria economy as a whole.
These are hereby highlighted below:
i. The study will be of immense benefit to students and Accountants in the Manufacturing outfit.
ii. The study will create a massive awareness on the risks
involved by using this technique during short run or one-off situation.
iii. The study will establish and ensure that information provided for decisions making are very much reliable.
iv. The study will encompass the ways of distinguishing between fixed cost and variable costs.
1.4 SCOPE AND LIMITATION
It is part of the management responsibilities to set up and implement
controls in an organization. This project will look into the various
marginal costing techniques and cost control in Nestle Nigeria Plc with
references to:
i. The need for costing and marginal costing techniques.
ii. The role of Nestle Nigeria Plc as per the use of marginal costing technique in the company.
The project will also look at information necessary for short term
decision making and how marginal costing can provide suitable
information. Limitation, however, to this study will include lack of
time due to other academic works, financial constraint which will make
the scope of the study to be limited to data provided by the management
of the company
1.5 HYPOTHESIS
1. Ho: Variable cost of production does not change with the level of activities.
Hi: Variable cost of production changes with the level of activities.
2. Ho: Inflation does not affect the demand for units of goods.
Hi: Inflation affects the demand for units of goods.
3. Ho: A sound marginal costing techniques do not influence the survival of a manufacturing company.
Hi: A sound marginal costing techniques influence the survival of a manufacturing company.
4. Ho: The level of production is not influenced by the demand for product.
Hi: The level of production is not influenced by the demand for product.