Application Of Marginal Costing Technique In A Manufacturing Company (A Case Study Of Nestle Nigeria Plc)

Project and Seminar Material for Accountancy / Accounting

Application Of Marginal Costing Technique In A Manufacturing Company (A Case Study Of Nestle Nigeria Plc)


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:

  1. A trade depression in industry
  2. Dumping
  3. 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:

  1. To understand the meaning and principle on which marginal costing operates and the purpose for which it is used.
  2. 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.
  3. To provide an appropriate basis for closing stock valuation and work in progress.
  4. To look into the existence and application of the basic principles of marginal costing techniques in Nestle Nigeria PIc.
  5. 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:

  1. The study will be of immense benefit to students and Accountants in the Manufacturing outfit.
  2. The study will create a massive awareness on the risks involved by using this technique during short run or one-off situation.
  3. The study will establish and ensure that information provided for decisions making are very much reliable.
  4. 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:

  1. The need for costing and marginal costing techniques.
  2. 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.

Chapter Five


5.0 Summary, Conclusion and Recommendation

5.1 Summary

The study revealed how marginal costing is a tool to the survival of the company. From the outcomes, some facts were deduced in order to bring the project to a logical conclusion and from there, reasonable recommendation were drawn.

In examining the application of marginal costing technique in Nestle Nigeria Plc, various approaches have been adopted. Firstly, a general relevant literature reviews on the concepts of the use of marginal costing technique. Secondly, the data collected were analyzed in order to draw conclusions about the practical application of marginal costing technique in the organization. Lastly, the operational efficiency and the effectiveness of the company are measured.


5.2 Conclusion

In conclusion, adequate costing system and marginal costing techniques is very important to every manufacturing organization, especially food industries. The marginal costing adopted by Nestle Nigeria Plc makes the costing and control system to be very effective and this has enabled the company to achieve a very good result yearly. The company internal control system is adequate in the area of cost control and as a result, the future wastage and idle period are minimal. Proper records are kept and adequate changes are being effected each time the occasion demand for it. Fixed and variable costs distinguished. Variable costs are being charged to cost units and a fixed cost attributed to the relevant period is written off against the contribution.

From the hypothesis tested and other data analyzed in chapter four, it can be concluded that:

  1. Variable cost of production changes with the level of activities.
  2. Inflation affects the demand for units of goods.
  3. A sound marginal costing techniques influence the survival of manufacturing company.
  4. The level of production is influenced by the demand for product.

In view of the above, the benefits of Marginal costing to the organization are as stated below:

  1. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided.
  2. It prevents the illogical carry forward in stock valuation of some proportion of current years fixed overhead.
  3. The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business.
  4. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate.

Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost.

It is useful to various levels of management. It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs.

Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making.

Finally, it cannot be strongly stressed that application of marginal costing will not have its shortcomings and its operation may be ineffective if not properly managed. The separation of costs into fixed and variable is difficult and sometimes gives misleading results. A system which ignores fixed costs is less effective since a major portion of fixed cost is not taken care of under marginal costing.

In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the assumptions underlying the theory of marginal costing sometimes becomes unrealistic. For long term profit planning, absorption costing is the only answer.


5.3 Recommendation

In spite of the above, Nestle Nigeria Plc should intensify efforts to ensure more adequate and accurate costing system and control. There are only three ways to improve profits. The business owner can cut costs or sell more or find more profit in a better pricing strategy.

Since in the downturn of 2008-2011, costs are likely already cut to the bone and sales are hard to find, adopting a better pricing strategy comes to top of mind. Merely raising prices is not always the answer. Too many businesses have been lost because they priced themselves out of the marketplace. One strategy does not fit all, so adopting a pricing strategy is a learning curve as you get to know your clients and customers better.

It is believed that if more research is conducted and accurate record is kept, the firm will achieve a greater height.


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