Costing As An Essential Instrument In Materials Management And Control

INTRODUCTION
This chapter ‘I’ deals with the Background of the study; Statement of Problems; Objectives of the study; Significance of the study; Research Questions; Delimitations of the study, Limitation of the study and Definition of terms.

1.1 Background of the Study
The aim of this research work is to identify the role, which costing can play in ensuring effective materials management. Materials management is an essential factor in the manufacturing industry, given the fact that materials are the principal substance for any manufacturing or production process.
Materials management and control involves the tedious process of organizing, planning and controlling all activities involved in the procurement, reception, issuance and storage of all material inventories. This process of organizing, planning and control embraces the technique of costing, hence, the topic “Costing As An Essential Instrument In Materials Management and Control”.
Planning and control are all functions of management and the application of accounting and costing principles is cost Accounting. Consequently, since the aim of control is to ensure good management, it goes without saying that the terms “costing” and “Cost Accounting” will be used interchangeably as well as “materials management” and “materials control” for the purpose of this research.
Since this is an important topic to the sustenance and growth of an manufacturing industry, the researcher has chosen a gigantic manufacturing outfit whose performance over the years is a success story as a study in this work.
Emenite Plc is a successful Building material manufacturing company based here in Enugu. It is situated at No. 7 Old Abakaliki Road, Emene Enugu, in Enugu State of Nigeria. The company is an affiliate of Eternity Group in Belgium. It was established in Nigeria on 6th October, 1961 as Turners Asbestors Industries Ltd. It started operations in 1963 after being commissioned by the Premier of then Eastern Region of Nigeria, the Late Dr. Michael Iheoaukara Okpara.
The name of the company was changed in 1976 from Turners Asbestors Industries Ltd. to Turners Building Products (Emene) Ltd. to reflect the diversification of its production line from Asbestors roofing sheets to include a variety of other building materials. Furthermore, the name of the company was changed from Turners Building Products (Emene) Ltd to Emenite Plc in 1989 when the company went public.
The study of a company like Emenite Plc in a research work on materials management will provide a very reliable insight into the techniques of effective materials management judging from its enviable performance over the years.
Costing as a subject of study over the years; ever since the use of money replaced barter, people have been cost conscious. However, it was the concentration of manufacturing facilities into factories, which gave impetus to the development of recognizable costing systems. Today, costing has grown in importance that it is widely used beyond manufacturing industries. Costing aims at providing management with information relating to costs with a view to assisting them in prudent management. Management efficiency is measured from overall objective of the organization. This underscores the importance of efficient materials management in any organization.
The application of costing in the materials handling of any organization will ensure that materials meant for production are optimally utilized for the purpose. When this is done, the production cost per unit of output will be affordable, thus, enhancing profitability. This is in contrast to a situation when materials are not handled with any control procedure. The resultant effect will be lack of adequate control, lack of accountability, losses occasioned by material pilferage, material wastage, material stock-out situation, idle time and inadequate utilization of installed capacity.
With the ever increasing growth in business and level of competition, business organizations are developing modern methods of operation in order to keep afloat. It will be equivalent to operating in the dark ages if a business organization does not operate with such reliable data as; minimum stock level, maximum stock level, re-order level, and economic ordering quantity. At the same time, production cost cannot be controlled if at any point in time management is uniformed about the quantity and cost of materials issued to production, as well as the quantity and value of material inventory in stock at any given time. In addition, it would be difficult to price the product of such organization.
Costing provides an indispensable tool in this all important aspect of planning and control procedures needed to ensure a continuous progress in the existence and operations of any manufacturing concern.
Materials management therefore embraces all those techniques aimed at instituting controls in all aspects of materials handling. It involves the procedure, which aims to ensure effective and efficient accounting for materials inventory with the aid of relevant source documents like purchase order, issue voucher, etc. It includes materials costing and valuation, which employs such tools as stock taking and stock valuation.

1.2 Statement of Problems
It has been observed that though most manufacturing companies have adopted various measures aimed at accounting for their material stock, adequate costing techniques have not been employed in this direction. There is a great difference between record keeping and accounting. Record keeping involves noting down in the books every bit of transaction that occurred in organization, but without any guiding principle. On the other hand, accounting involves the recording of every business transaction with strict adherence to lay down principles. Consequently, records only provide information from which end results could be calculated by a skilled person and can be kept by any body, but accounting on the other hand can only be kept by someone trained in the field of accounting in which case accounting records will embrace ab-initio all the guiding principles necessary to ensure that results are disclosed at any given time, and are capable of being understood by interest users of accounting information.
With the growth of industrial activities within the manufacturing sector, it has been proved that mere records such as obtainable in a sole proprietorship falls short of providing solution towards the attainment of organizational objectives. The sole proprietorship is a self subsistence type of business, and may have no further objectives as long as the returns is enough to sustain family upkeep expenses. But in contrast, management efficiency in corporate organizations is measured by its level of performance towards the attainment of corporate objectives. Such objectives must above all, ensure adequate return on invested fund, which will be enough to meet the claims on the assets of the company. With these challenges, in view, there is the need to set up an organized structure in order to ensure effective operations, hence a cost accounting department charged with responsibility of materials control and management must be put in place.
Furthermore, since materials are the principal substance to any production process, it implies that materials form the basis of organizations continuous existence. This goes to suggest that large volume of capital is committed to material procurement necessitating adequate controls in order to forestall any ugly incidence that may jeopardize the company’s operations. Materials control measures capable of achieving results must ensure at all times that the incidence of over-stocking or under-stocking of materials at any given time is eliminated.

1.3 Objectives of the Study
The following are the objectives of this study:
i. To make a case for the application of costing systems in the control and management of materials.
ii. To highlight various methods available to organizations in costing and valuing materials, among which are:
(a) First In First Out (FIFO)
(b) Last In First Out (LIFO)
(c) Average Price Method
(d) Base Stock Method
(e) Standard Price Method
(f) Current Market Price
(g) Highest In First Out (HIFO)
(h) Next In First Out (NIFO)
(iii) To make useful recommendation on how to apply costing system in management of material.

1.4 Significance of the Study
This study will provide a resource material to all students of accountancy and all accountants in both the industrial, commercial and private sector. Practicing Accountants will benefit from the inputs made in this study as it will serve as a guide to clients’ consultancy services in the area of costing, control and management of materials.
By the time this work is completed, adequate awareness would have been created as to the need to employ costing techniques in the material handling procedures of organizations, whether manufacturing or merchandising, it will highlight the fact that materials control is not only to be restricted to raw materials, but embraces aimed at forestalling wastages, avoidable loses and lack of accountability. The aim should be seen to include adequate control of all inventory; raw materials and finished goods inventing alike.
A careful application of the contribution made in this work will help organizations in determining their true state of affairs at the end of any given period, as realistic values will be placed on both opening and closing inventories, while issues to production and sales will be costed most appropriately in such a way that cost per unit of output is not either understated or overstated; while cost of sales reflects commensurate costs to the transactional activities of the organization concerned. This achievement in effect will give a true picture of the business as reported in the company’s financial statements.

1.5 Research Questions
1.5.1 To what degree the material management perpetuate the existence of an industry?
1.5.2 To what extent the material management and control facilitate the growth of Emenite?
1.5.3 To what level the application of costing contributed to the material control if Emenite?

1.6 Scope/Delimitation of the Study
The scope of the study is the basic aspect of the industry being studied. It refers to the particular centre of reference of the study which is “Costing As An Essential Instrument In Materials Management And Control”.

1.7 Limitation of the Study
1.7.1 Time Constraint: As a wide topic, it is supposed to cover a number of industries in the manufacturing sector so as to accentuate the proposition, which the topic postulates, but time constraint has been a great hindrance in trying to carry out an extensive research work.
1.7.2 It has been a difficult task combining academic activities with office work, and at the same time, trying to cope with family responsibilities.
1.7.3 Consequently, all the economic factors within the country; the ever depreciating value of the naira with its attendant inflationary upsurge, the constant scarcity of fuel and other petroleum products resulting in arbitrary like in the prices of such products and transport fares, etc. which erodes the purchasing power of an average Nigerian; have contributed in no small measure to the limitation of adequate resources needed by the researcher to explore wider avenues in soliciting relevant information to justify the envisaged coverage of the study.
1.7.4 As a result of its expatriate affiliation, information flow in Emenite Plc, which is chosen as the case study has been restricted to certain areas of operation and to a certain extent. It is almost impossible to secure the release of official documents for more detailed information.

1.8 Definition of Terms
Ab-initio – From the beginning; Right from
the word go.
Affloat – Keep on going; to keep active.
Accentuate – To give more force or importance to
Arbitrary – Dictatorial conduct based on
impulse, not on reason.
Embrace – To include; to cover an area.
Erode – To wear away; to render
ineffective.
Expatriate – Relationship with foreign countries
to live outside one’s own country.
Explore – To conduct an extensive research.
To look into wide areas.
Impetus – Driving force.
Inventory – Detailed list of goods; stock of
materials or finished goods.
Pilferage – Gradual stealing
Pivot – Something on which the thing
depends; on which success or failure lies.
Postulate – Put forward, to take for granted as
a necessary fact or as a basis for reasoning.
Substance – Most important part
Subsistence – Means of existence; something
that is only just enough to enable one exist.
Technique – Method of doing something
expertly.
Tedious – Tiresome, wearing, difficult
exercise.
Upsurge – Rise.