ABSTRACT
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.
CHAPTER ONE
INTRODUCTION
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 decision.
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:
a. Absorption costing/ full costing
b. 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 costing.
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.
a. In 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.
b. As 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 costing will:
i. Include some fixed production overhead costs incurred
in a previous period but carried forward into opening stock values of
the current period;
ii. 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.)
c. In 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.
d. In 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;
i. Showing the importance of marginal costing as a tool for planning and short term decision making.
ii. Ascertaining the format to be used on presenting
marginal costing information by management Accountants to the
management.
iii. Evaluating the extent to which marginal costing can be used for pricing method.
iv. Examining whether marginal costing has helped the management to achieve high profitability level.