Effectiveness Of Standard Costing As A Control Tool For Performance Evaluation In Manufacturing Industries

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Effectiveness Of Standard Costing As A Control Tool For Performance Evaluation In Manufacturing Industries


Abstract


Basically the direction towards an efficient production of goods and services could be as a result of an effective control of cost of production. The study of standard costing as an aid in production cost control is very imperative especially in an economy with high rate of inflation and where prices of goods and services are constantly increasing with no hope of reduction with the effect that the real value of money in the consumers hand is lower than its face value. This being the case, the consumers only have little to spend, therefore what will be uppermost in their minds is to buy products of cheaper rate when compared with other products of the same quality. So this research looked into how effective stand costing is in the control of production cost and performance appraisal with reference to the Anambra motor manufacturing company (ANAMMCO) Enugu. It is the believe of the researcher that for the company to meet one of its goals of producing at a reduced cost but consistent quality for customers satisfaction. It has to establish measures to effectively monitor and control production cost. Standard, costing is one of the measures of achieving this. Conclusively, in order to achieve this purpose, background of study, statement of problem, objective of study, signification of study were show in chapter one of this project.


Chapter One


Introduction

Civilization sincerely is a welcome phenomenon. The business world is not left out in its resultant effect. Thus, the degree of complexity and sophistication of situations obtainable in the present days business has called for not just experience but effective and formidable managers. The practicality commitment and inefficiency of every manager could be measured based on his ability to plan organize, direct, cirutrol, co-ordinate meteorite and evaluate his business activities these function centers on the resultant checksum makings the process of which are route which have no close substitute as far as the profit making and progress of any business is concerned.

Hence it is early detached that the profit making to cover the cost and the survival o every industry has informatively become an increasingly difficult task therefore mangers are faced with entire managerial decision making crises. Sequel to that the ability of every management to have the managerial decision making process. under control become pertinent as such industry strive to push and present its product is a position it could be preferred to the products of other firms in the same line of business. This gare rise to management accounting which improved from the old quantitative approach to accounting to encompass the quantitative approach to accounting practices (Nweze 1999: 158) management and cost accounting is one of the largest part of the entire business management is essentially an embodiment of product costing planning and decision making activities toward the enhancement of the product quality and evaluation of the performance of the various employees geared toward the attainment of the overall objective of the organization or industry, it is all accounting in the broadest sense (Size 1979:15) This product costing which encompass standard costing aims at the ascertainment of the cost of that product.

Nevertheless the efficiency of every manager hers in his ability to manipulate and harness successfully all the factors needed for effective production. This creates the need for development of certain measured for the control of activities of subordinate with respect to cost volume of output and profit. However cost is the most crncral because its may sometime assume a limiting factor. Mores, it affects profit and its central lead to profit realization (Brown 1975: 172). According to Keller (1996:172) every firm which aspires for efficient productive additive and long term profitability should plan and control its cost of production. In line with this firm should aim quality specification and other representation made to the customers.

Precisely the cost incurred by manufacturing firm in their cruise of production most importantly need to be controlled owing to the sense that they forms the bases for which product cost is analyzed. These cost include the direct material cost direct labour and factory overhead or indirect manufacturing costs.

Many organization prepare their budget annually usually at the beginning of a fiscal year. This budget is expected to cover all the organizations phases of business activities and more so acts as a guide for measuring their overall performance. This budget is a total concept and might not make any meaning to the component departments of the organization. It is then broken to a unit concept which is what standard cost is associated with for the purpose of control and performance appraisal. Standard costs are part of as overall operating budget of an organization that has been elaborately and carefully defined; in that they are developed in such minute details that any derivation from such standard can be traced to its source and responsibility for such derivation established.

At this point it become necessary to point out that for standard costing to operate efficiently as a control, cost centers must be established with clearly defined areas of responsibility so as to cover only those matters which clearly comes within the control of its supervisor. It may be a location equipment or items so that deviation can be traced directly to the cost centers from where it occurred without muddling up the control structure of the firm or industry. This study centers on the use of standard costing in the production cost control and performance evaluation in manufacturing industries, but because of time and cost involved in covering the number manufactures. The researcher. Focus his attention to the Anambra state more manufacturing industry (ANAMMCO)_ Emene Enugu.


1.1 Background of the Study

Knowing that a standard is an establish basis or measure against which actual result of performance is bench marked. Standard cost is a predetermined or established cost, or target or goal which the management of a firm or industry aims at achieving given a conducive operating condition with a view of attaining maximum efficiency in its production. I is a pre- determined or forecast estimates of cost to manufacture a single unit or a number of cost to manufacture a single unit or a number of units of product during a specific immediate future period (Keller et al 1966: 171) There fore, standard costing is a costing technique which compares the standard cost of a units of product with the actual cost to determine the efficiency of operations with the ultimate intention of carrying out any remedial action whenever necessary.

Based on the fact that they are pre- determined units cost estimates deviation are bound to occur and these are pin pointed in that they represents measures of performance. These deviations are termed variance, and are isolated for an in-depth analysis to reflect in the variance aids to the initiation of corrective and control action, so as to direct the operational activities of the firm to conform with the standard cost as determined prior to those activities.
One basic principle is that standard cost (whatever type) is used as a control of production cost, employees excesses and thus ards to the performance apprcrisal bearing in mind the over all objective of the firm or industry. As opined by Ama (2001: 7) the task of control accounting is to produce data at regular interval in a standard form so that the firms actual performance can be compared with plans and budgets and differences analyzed by causes. By implication the progress of every manufacturing firm cannot be achieved on a total neglect of this cost control technique.

The Anambra motor manufacturing company Ltd (ANAMMCO) a manufacturer of automobile engines is not an exception to these assertion. For cost reduction and minimization it is necessary that firms adopt standard costing and make effective use of it as a cost control measure with which to evaluate its performance

The Anambra motor manufacturing company limited the case study of the researcher was established by the federal military government of Nigeria in its effort to move the country forward the attainment of industrial development and technological advancement and independence. This in 1975 started with as inter aha negotiation of joint venture agreement with among other manufacturing of vehicle DAMLER BENZ AG OF THE FEDERAL REPUBLIC OF GRRMARY. This partnership agreement between the federal military government of Nigeria and Daimler Benz AG was signed on the 12th December 1975. On duly 8, 1980, the first executive president of Nigeria Alhaji shelar Shagari commissioned the plast located at Emene Enugu state which occupies a spiraling 3000, 000 square metre. Official production commenced on January 1981 with a staff strength of 794 staff comprising 782 Nigeria and 12 foreign expatriates. The plant has an installed production capacity of 75,00 commercial vehicles per annum.
The company originally has the plan to produce truck for the Nigeria market but have today chirersifred to a product range which include for rapid industrialization of Nigeria. Track such as L700, l1418 and ACTROS were not only produced but they have gone step further in the designing fabricating, manufacturing and production as well as sales of buses and other utility vehicles. Among its product range include; MBO 800, MBO1418, MBO 1721, MBO 4000 MARCOPOLO/ BUSSEAR, FIR FIGHTING VEHICLE Ambulatory mobile clinics refruse collector and other various specialized types of vehicles.

Despite the fact that prices o these product are dictated by in falconry trend in the economy. This does not value not the cost factor in producing the vehicles so as to maintain a lower production cost which invariably helps the company to under and its rivals.,


1.2 Statement of Problem

The problem of control as a function of the business manager and evaluation of the performance of the entire organization has become a hydra – leaded outlook. Moreso, the economic hardship characterized b y high rate of inflation, fluctuation in the prices of goods, high cost of production among other task has led many companies to find ways of their production facilities in operation till a time when the economy is expected to improve. Such companies adopt cost control over production cost as to reduce and eliminate wastages.

Standard Costing is one of the cost control techniques which has been developed for years. And its widely application by many companies has proved it to be effective in supplying use information for cost control.
It is also worthy to note that standard costing in itself cannot control costs but can only be useful when the information supplied by this is applied to cost. With standard costing, technique efficiency can be determined through comparism of the actual incurred cost with the existing standard but for the fact that production input are procured in an open market, it is affected by the inflation rate. This become a problem to the cost accountant in supplying accurate cost information. Therefore a cost information supplied today may become outdated in the next day.

In addition quality maintenance of the product given the current economic hardship and high cost production is concern to both the management of the company and its consumers. To guarantee the customers loyalty and there by ensure continuous profit, the quality have to be maintained though it might be costly. It is left for this company to decide on whether to use high quality material which might be costly or low quality material at lower cost but would lower the quality of the product.

In the view of a company to survive this economic hardship operate effectively, efficiently and ensure privtitability, it must take care of its cost of production which is the basis on which profit is realized.


1.3 The Objective of the Study

The general aim of this study is to examine the effectiveness of standard costing as a control tool for performance evaluation in manufacturing industries.

Specifically the study is set to;

  1. Determine the effectiveness of the application of standard costing system in controlling the production cost.
  2. Determine if inflation impede the effectiveness of standard costing in an organization.
  3. Determine if standard costing effectively and efficiently aid the evaluation of an organizational performance.
  4. Ascertain if standard costing data influences managerial decision making
  5. Ascertain if standard costing system help in the elimination and redaction of wastage

1.4 Research Questions

The study will be guided by the following questions;

  1. Is the application of standard costing system effective in controlling production cost?
  2. Does inflation impede the effectiveness of standard costing in the organization?
  3. Does standard costing effectively and efficiently aid the evaluation of an organizational performance?
  4. Does standard costing data influences managerial decision making?
  5. Does standard costing system help in the elimination and redaction of wastage in the organization?

1.5 Significance of the Study

This research is mainly carried out as a requirment in the partial fulfillment of the award of higher National Diploma (HND) in accounting.

It is also expected to help the researcher and other interested studies to have an insight of the practicability of the wholesome theoretical as seen in many textbooks on the concept of standard costing technique.

This additionally brings to the notice of the Nigeria would be entrepreneur and already existing companies the need to appreciate the use of standard costing in controlling costs and basis for performance evaluation.


1.6 Scope of the Study

This research is intended to examine the effectiveness of standard costing as a control tool for performance evaluation in manufacturing firms, with specific emphasis on if inflation impede the effectiveness of standard costing in an organization, if standard costing effectively and efficiently aid the evaluation of an organizational performance. if standard costing data influences managerial decision making, and if standard costing system help in the elimination and redaction of wastage. The study will be carried out in ANAMMCO, Enugu State, and the respondents will be obtained from the finance/accounting department of the organization.


1.7 Limitation of the Study

Since this requires constant transportation to Emene where the company of my case study is located the in availability of the fund required for this possess the first limitation to this. This is followed by the inability of the management to divulge certain information which they consider sensitive and the publication of which is detrimental to their operations. Moreso, the attention of the members of top management whom may not be chanced on several occasions proved a limitation to this research.

I must also comment on the limited time gives for the completion of this research which is amplified when considered that the researcher have to attend to other aspect of his study other than the research work alone since both research work and academic studies are run concurrently.


1.8 Definitions of Terms

1. Quantitative accenting approach:

This is that approach to accreting which concerns itself with only data that can be qualified in monetary terms.

2. Qualitative accounting approach:

This unlike the number one above take cognizance of data that matters but can not be qualified in monetary terms.

3. Limiting factor:

This is that factor that can be a constraint to the expansion of production. It is sometimes termed they factor.

4. Cost control:

This as used in this study an operating function but not an accounting function. It is the manipulation of cost through operating personnel precisely, it is the employment of all the management devices in the performance of an important operation so as to meet the already established objectives of quantity and quality with the lowest possible outlay of input

5. Cost centre:

This is a desirable are of activity within a business to which costs can be attributed. In the content of manufacturing firm. It is those manufacturing units or departments in respect of which cost can be ascertained and over which cost can be controlled.

6. Cost reduction:

This is also an operating function this aim at the employment of the management derives in the performance of some important operation so as to reduce cost firm what it use to be. This can be achieved through a change in the system of production labour intensive to capital intensive)

7. Performance:

This is the act of measuring appraising and comparing the operational results of different profit centers of an organization.

8. Variance:

This is the difference between the actual performance and the expected performance expressed by the standard costing. Simply put, it is a difference between standard cost and actual cost.

9. Benchmark:

This is used in this study means the process of companism between what is and what is supposed to be.


Chapter Five


Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the effectiveness of standard costing as a control tool for performance evaluation in manufacturing industries using ANAMMCO, Enugu State as case study. The chapter consists of summary of the study, conclusions, and recommendations.


5.2 Summary of the Study

In this study, our focus was on the effectiveness of standard costing as a control tool for performance evaluation in manufacturing industries using ANAMMCO, Enugu State as case study. The study is was specifically carried out to determine the effectiveness of the application of standard costing system in controlling the production cost, determine if inflation impede the effectiveness of standard costing in an organization, determine if standard costing effectively and efficiently aid the evaluation of an organizational performance, ascertain if standard costing data influences managerial decision making, and ascertain if standard costing system help in the elimination and redaction of wastage.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 30 responses were validated from the enrolled participants where all respondent were staff in the finance/accounting department of ANAMMCO Enugu State.


5.3 Conclusions

Based on the findings of this study, the researcher concluded that;

  1. Inflation impede the effectiveness of standard costing in the organization.
  2. Standard costing effectively and efficiently aid the evaluation of an organizational performance.
  3. Standard costing data influences managerial decision making.
  4. Standard costing system help in the elimination and redaction of wastage in the organization.

5.4 Recommendations

Based on the findings of the study, the following recommendations are proffered.

  1. Management should devise appropriate strategic measures for the adoption of standard costing to enhance efficiency in material, labor, and overhead costs.
  2. They should also pattern their operations in line with the environmental factors that hinder the effective use of standard costing, such as economic policies, political instability, changes in government, changes in technology, changes in general price level, etc.. These environmental factors should be carefully studied by management so that a reasonable forecast of possible changes in the environment can be made.

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