Marginal Costing As An Essential Tool For Decision Making In A Manufacturing Company
(A Case Study Of Anamco Enugu)
Marginal costing serves as a vital tool for decision-making in manufacturing companies by providing insights into cost behavior and facilitating informed choices. Unlike traditional absorption costing, marginal costing segregates fixed and variable costs, enabling managers to ascertain the incremental cost of producing one additional unit. This clarity allows for better pricing strategies, product mix decisions, and identification of cost-effective production levels. By focusing on the marginal cost of production, managers can assess the profitability of various options, optimize resource allocation, and enhance overall operational efficiency, ultimately contributing to the company’s competitiveness and long-term success in the dynamic market environment.
Decision-making has become a main concern to any organization, and efforts are being made by management to make sure that best decisions are made.
Therefore, this study investigates the effectiveness and efficacy of marginal costing as an essential tool for decision-making. To determine this, the fundamental objectives of the study among others are
(a) An evaluation of the marginal costing technique towards ascertaining the effeteness and efficiency.
(b) Finding out any inherent deficiencies in its application.
(c) To determine the criteria for cost control and analysis.
(d) How product decisions are made by management under this technique.
(e) And how, management decision-making is aided under the technique.
In investigating the above, data were obtained through question mare administered to management staff and few senior staff who have knowledge about the technique under application. More so, useful pieces of information were got from libraries. The collected data were classified, analysis and interpreted by tabular discussion and simple percentage analysis, and the hypothesis were tested by using the chi-square method form the analysis of data, the major findings were that:
ANAMMCO apply marginal costing technique in valuation of stock, cost planning are control,
(a) The company purposefully uses these techniques for the following reasons:
• Decision making
• Controlling of cost
• Fixing of prices
(b) ANAMMCO uses marginal costing because it is simple to operate.
(c) ANAMMCO used marginal costing technique because it shows a meaningful and more realistic profit position of the company.
(d) The technique easily reveals the contribution made by each product or department.
(e) That when faced with decision about the best alternative the marginal costing technique is applied.
(f) When there is a special order, in deciding whether to accept or reject the special order marginal costing technique is used. Based on the findings the following recommendations were made.
a. The organization should fund a way of ensuring that instrumentality is closely tied to productivity or output of the employee.
b. Due to the difficulty associated with receipt of orders, the orders for basic raw materials should be made long in advance.
c. Where there is a request for special order, marginal costing should be applied
d. The company budgetary control system should be supported with the standard costing technique from effective control of materials and labour cost.
Above all, I strongly believe that if recommendations and accepted and vigorously pursued the decision-making will meet the set organizational objectives.
Title page i
Certification ii
Dedication iii
Acknowledgment iv
Preface v
Abstract ix
Table of contents xii
CHAPTER ONE
1.0 Introduction 1
1.1 Background of study 1
1.2 Statement of problem 4
1.3 Objectives of study 5
1.4 Significance of study 5
1.5 Scope of the study 6
1.6 Limitation of study 7
1.7 Definition of terms 7
1.8 Hypothesis 9
CHAPTER TWO
2.0 Review of Related Literature 10
2.1 Marginal Costing 10
2.2 The Principles of Marginal costing 15
2.3 Marginal costing and decision making 20
2.3.1 Acceptance of special order 24
2.3.2 Add or Drop Decision 27
2.3.3 Make or buy Decision 31
2.4 The contribution margin theory 36
2.5 Marginal versus Absorption costing 39
2.6 Marginal costing and profit 46
2.7 The breakdown Analysis and Decision making 48
2.8 Advantages and Disadvantages
of marginal costing references 61
CHAPTER THREE
3.0 Research Design and Methodology 63
3.1 An Overview 63
3.2 Sources of Data 64
3.3 Sample used 65
3.4 Method of Investigation 65
3.5 Problem encountered in data collection process 67
CHAPTER FOUR
4.0 Data Presentation and Analysis 68
4.1 An Overview 68
4.2 Analysis of Responses 69
4.3 Hypothesis 83
CHAPTER FIVE
5.0 Findings, Recommendation and Conclusion 87
5.1 Summary of Findings 87
5.2 Conclusion 88
5.3 Recommendations 90
1.0 INTRODUCTION
1.1 BACKGROUND OF STUDY
The reality of modern business management in a free enterprise economic system is the level of competition among all the enterprise, where only the filter enterprises survive. The motive for maximization of profit in business and quest for Wealth Creation being in vogue, management continues to remain under increasing obligation to improve its share of the market, its assets, its credit worthiness and its overall potential.
These in turn require an improvement in the quality of decision. Therefore in order to respond effectively to the challenges of time, management requires good factors in business decisions.
This research work is a real attempt to investigate into the principle and practice of marginal costing as an essential tool for decision-making in Manufacturing Companies using Anambra Motor Manufacturing Company (ANAMMCO) as a case study.
This study will critically examine the following:
– The condition for analyzing cost into fixed and variable components.
– How the cost are normally controlled,
– And how management decision in aided under the technique.
An appraisal is necessary in order to determine effectiveness and efficiency of the management accounting technique. In carrying out this research work, data was got from questionnaire.
Information and analysis of the data, using the percentage method to analyze the response elicited from respondents. Also the personal observation methods were used, together with relevant information from libraries.
BRIEF HISTORY OF ANAMMCO LIMITED
Against the background of rapid economic growth, the Federal Military Government in 1975 was faced with the enormous task of developing the country’s infrastructure from one geared toward peasant farming to one oriented towards mechanized agriculture and industry.
The Anambra Motor Manufacturing Company is the result of the economic and technological co-operation between the government and the people of Nigeria and DAIMLER-BENZ AG OF West Germany. The company is located at Emene Industrial layout, Enugu. The site covers an area measuring over 300,000 square meters generously leased by the state government.
Although, the partnership agreement was signed in 1975, the company was incorporated in Nigeria on the 17th of January, 1977 under the name Anambra Motor Manufacturing Company Limited and a Cronym ANAMMCO. As a private limited liability company with an authorized share capital of N7,000,000 ordinary shares of N1.00 each all of which were issued and fully paid up.
SHARE HOLDING
The share holding structure is as follows:
%
Daimler –Benz Ag of Germany 40.00
Federal Government of Nigeria 35.00
Anambra State Government 12.50
Imo state Government 2.50
Rivers State Government 3.40
Nigeria Citizens and Associates 6.60
100.00
Despite the fact that the Company was incorporated in 1977, the laying of foundations stone was done on 12th of May, 1978 by then Military Governor of the old Anambra State, Col. John Atom Kpera. The official commissioning of the plant was done on July 8th 1980, by the President of the Federal Republic of Nigeria, Alhaji Aliyu Usman Shehu Shagarri.
1.2 STATEMENT OF PROBLEM
This study will try to answer the questions listed below:
a. Can marginal costing reduce the arbitrary allocation of production cost to cost centres?
b. With this technique of marginal costing can production not be increase without increasing the amount of fixed cost?
c. When management is faced with two or more alternative choices of product, is marginal costing a useful tool for selecting or choosing the best alternative?
1.3 OBJECTIVES OF STUDY
Marginal costing as an essential tool for decision-making. Marginal costing technique of cost accounting tends to separate cost into variables and fixed components. Bearing this mind, the objectives of this study among other things include:
– An evaluation of the marginal costing technique towards ascertaining its effectiveness and efficiency.
– Finding out any inherent deficiencies in its application.
– To determine the condition for cost control and analysis and
– Examine how management under this technique makes product decisions.
1.4 SIGNIFICANCE OF THE STUDY
Since it is a technique of cost accounting adopted by an organization to measure its profitability, any effort geared towards establishing how the technique helps in the profit realization of the organization in worthwhile.
Since this relationship is reciprocal, any suggestion on the improvement of the costing technique should have some bearing on profit improvement.
It output or productively is to be enhanced, and profit maximized, a knowledge of cost behaviour and analysis into the various components is essential and worth undertaking.
Based on the findings of this study and the suggestions proffered, it is strongly hoped that attention to them would go a long way in improving the profit position of the firm.
1.5 SCOPE OF THE STUDY
This study is limited to the survey of how the marginal costing technique is used to make decision at the Anambra Motor Manufacturing Company (ANAMMCO) and how effective and efficient it is to the company. This investigation is not to be taken as an exhaustive piece.
1.6 LIMITATION OF THE STUDY
This researcher had difficulties in collecting all the relevant data required for an depth evaluation of this subject. This constraint emanated from the fact that the Company (ANAMMCO) is said to be a competitive manufacturing company concern and the General manager considers its risk to issue out information required.
1.7 DEFINITION OF TERMS
MANUFACTURING INDUSTRY: A manufacturing industry is one that acquires raw materials and intermediate goods and transfer them to finished goods through an industrial process. This definition satisfies the purpose of this study. A manufacturing industry can also be defined as one where pre-occupation is the processing of materials into other goods through the use of labour and factory facilities.
MARGINAL COST: Marginal cost is the amount at any given volume of output by which aggregate cost are changed of the volume of output is increased or decrease by one unit.
The marginal cost of a product is alternatively known as its variable cost, which includes direct material, direct labour and direct experiences and the variable part of overheads.
MARGINAL COSTING: Marginal costing is defined by (IMA’S officials terminology as “A principle whereby variable cost are charged to cost units and fixed cost attributable to the relevant periods is written off in full against the contribution in that period”.
FIXED COST: Fixed cost is a cost that accrues in relation to the passage of time and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the level of activity.
It is treated as period cost and are charged in full to the profit and loss account of the accounting period which they are incurred.
CONTRIBUTION: Contribution is the different between sales value an the variable cost of those sales expressed either in absolute terms or as a contribution per unit. This is the central point in marginal costing. When the contribution per unit is expressed as the different between the selling price and its marginal cost.
Marginal costing cannot be used without calculating the contribution.
1.8 HYPOTHESIS
The following hypotheses are proposed for this study.
i. Marginal costing principles aid prudent management decision-making.
ii. Statements prepared using marginal costing principles are easier to understand by management.
iii. Marginal costing aid in the achievement of the organizational goal.
Marginal Costing As An Essential Tool For Decision Making In A Manufacturing Company:
Marginal costing is indeed an essential tool for decision-making in a manufacturing company. It provides valuable insights into the cost structure and profitability of products or services and helps management make informed decisions. Here’s how marginal costing is used for decision-making in a manufacturing company:
- Product Pricing: Marginal costing helps in setting appropriate prices for products. By calculating the marginal cost (which includes only variable costs) of producing one more unit, a company can decide on a selling price that covers both variable and fixed costs while ensuring profitability.
- Product Mix Decisions: Manufacturing companies often produce multiple products. Marginal costing can help in determining which products to produce or discontinue. By comparing the contribution margin (selling price minus variable cost) of each product, management can prioritize those that are more profitable.
- Special Orders: When a manufacturing company receives a special order or a large one-time order, marginal costing can be used to assess its profitability. By analyzing the contribution margin of the special order, the company can decide whether to accept or reject it.
- Make or Buy Decisions: Companies often face the decision of whether to manufacture a component or buy it from an external supplier. Marginal costing can help by comparing the variable costs of in-house production with the purchase cost from a supplier.
- Break-Even Analysis: Marginal costing is instrumental in calculating the break-even point – the level of sales at which total revenue equals total variable and fixed costs. This information helps management understand when the company will start making a profit and how changes in sales volume will affect profitability.
- Cost Control: Marginal costing emphasizes variable costs, making it easier for management to identify areas where cost control measures are needed. This is particularly useful for reducing wastage and inefficiencies in production processes.
- Profit Planning: Marginal costing allows for better profit planning. Companies can set target profit levels and use marginal costing to determine the required sales volume to achieve those targets.
- Inventory Management: Marginal costing can aid in managing inventory levels efficiently. By focusing on variable costs, it helps in assessing the cost implications of carrying excess inventory and helps in optimizing stock levels.
- Resource Allocation: In scenarios where resources such as labor and machine time are limited, marginal costing can assist in allocating these resources to products that generate the highest contribution margin, maximizing overall profitability.
- Investment Decisions: When considering investments in new machinery or expanding production capacity, marginal costing can be used to evaluate the expected returns and payback periods, helping management make sound investment decisions.
In summary, marginal costing is a powerful tool for decision-making in manufacturing companies because it provides a clear picture of the cost structure and profitability of products or activities. It enables management to make informed choices about pricing, product mix, cost control, and resource allocation, ultimately contributing to improved financial performance and competitiveness.