The Role Of Cost Accounting Techniques In Achieving Effective Cost Control In The Manufacturing Industry

Project and Seminar Material for Accountancy / Accounting

The Role Of Cost Accounting Techniques In Achieving Effective Cost Control In The Manufacturing Industry


This research report was carried out to ascertain whether traditional costing techniques (standard, marginal and absorption costing) are still relevant for today’s demand and greater cost accuracy. Managers and Accounting are confused about which of these techniques will enhance effective cost control and effective management decision. Several literatures were reviewed and the problems were investigated through the use of quantitative research design where questionnaires were distributed to the production department of Coca-Cola Nigeria PLC which is the case study. The questionnaire was analyzed using the ordinary least square regression method and correlation co-efficient from which the hypothesis were tested and conclusions reached. The analysis reveals that traditional costing techniques are still relevant for today’s demand and greater cost accuracy and that Marginal costing is the most effective for cost control and effective management decision. In conclusion, the result is useful because Academic and Practitioner can reach a consensus that these costing techniques are not outdated but very relevant and Managers can explore a greater use of Marginal Costing as the most effective tool for cost control effective management decision.

Chapter One


1.0 Background of the Study

Costing techniques is the process of ascertaining cost. These techniques consist of principles and rules which govern the procedure of ascertaining cost of products or services. The techniques to be followed for analysis of expenses and the processes of different products vary from industry to industry. The main object of costing is the analysis of financial records so as to subdivide expenditure and to allocate it carefully to selected cost centers and hence build up a total cost for the products. (The Institute of Company Secretaries of India, (2013). In the ancient days, the information required by those who were interested in a business organization was met by practicing a system of accounting known as financial accounting system. Financial accounting is mainly concerned with preparation of two important statements, viz., income statement (or profit & loss account) and positional statement (or Balance Sheet). This information served the needs of all those who are not directly associated with management of business. Thus financial accounts are concerned with external reporting as it provides information to external authorities. But the management of every business organization is interested to know much more than the usual information supplied to outsiders. In order to carry out its functions of planning, decision-making and control, it requires additional cost data. The financial accounts to some extent fail to provide required cost data to management and hence a new system of accounting which could provide internal report to management was conceived of and this is the genesis of Cost Accounting and its techniques such as Marginal costing, Standard costing, Absorption costing e.t.c. The history of cost accounting techniques can be traced back to the fourteenth century. In the course of its evolution, it passed through following stages.

  1. In the first stage of its development, cost accounting was concerned only with the three prime cost elements, viz., direct material cost, direct labor cost and direct expenses. For recording the transactions relating to materials the important documents used were (a) stores ledger, (b) a material requisition note, and (c) materials received note. To account for labor cost, employee time card and labor cost card were devised by Mr. Metcalfe. Later on a distinction between manufacturing and non-manufacturing cost was made by Mr. Norton. Thus material cost, labor cost and manufacturing cost constituted prime cost.
  2. Secondly, around the turn of the nineteenth century, the importance of nonmanufacturing cost (overheads) was recognized as one of the distinct element of cost. The method of charging non-manufacturing cost to the production cost was devised under this stage.
  3. Thirdly, the techniques of estimation and standards are devised. Instead of using actual cost, standard costs are used and by comparing with the actual cost the differences are noted, analyzed and disposed off accordingly. This helps in knowing the efficiency of the business undertaking.
  4. Fourthly, cost accounting techniques were applied to all types of business undertakings. The costing principles and techniques were also extended to important functions of a business.
  5. In modem times the development of electronic data processing has occupied significant stage in the growth of cost accounting system. Having ascertained ‘cost’ and ‘profit’, cost accountancy is concerned with presentation of information to management to enable management to carry out its functions, reports must be promptly made available at the right time.

(Sangladji , 2008). From the mid 1980s, the start of new movements in the field of managerial/cost accounting, a gap has emerged between the opinions of academia and practitioners regarding the degree of usefulness of managerial/cost accounting techniques. It is believed that practitioners generally prefer managerial/cost accounting techniques which are simple, practical and economically applicable. On the other hand, many authors and academia believe that the traditional managerial/cost accounting techniques are obsolete and not effective for managerial decision-making purposes and cost control. As stated by one author, most of the traditional management/cost accounting information are usually too late, too aggregated, and too distorted to be relevant for decision-making purposes. Despite the considerable criticisms to the traditional costing techniques and increasing interest in developing new managerial/cost accounting models in recent years, the traditional cost accounting techniques are still widely used by many organization (Sangladji,2008).

According to previous researchers, as stated by Nguyen (2011), different costing techniques have different core competitive advantages to organizations. From the oldest to newest method, decision of managers is still affected, As a result, finding the best method to reduce the failure rates and increase the effectiveness of cost allocation and control is a hard question for both managers and accountants. Based on the accounting history, there are many types of costing method such as: traditional or absorption costing method, variable costing method, standard costing, throughput costing method, and ABC costing method. Changes in business environment requires a better method which can help managers control their performance. For many researchers, cost accounting techniques are still a major concern for them. Different techniques lead to different decisions of the managers therefore profits to the organizations can not be the same. A dynamic business environment lead to the need for new costing methods for new cost objects. Marginal costing was born as a result of the demand for this. According to this method, only costs which are adjusted to the production process should he concerned by managers. However, in the long run, some fixed costs still need to change. As a must a new cost accounting method is invented. Instead at sharing equally among various departments and maintaining the fixed costs in the long run, expenses arc divided differently based on some factors such as labor hours, direct materials and the fixed cost can be changed based on the need of the production process. None of the products need the same quantity of direct material as well as the direct labor hours. So managers should know how to use and allocate costs more efficiently. However, for the purpose of this research, the costing techniques the researcher shall be examining will be limited to Marginal costing, Absorption costing and Standard Costing being the commonest traditional costing techniques as time and space will not allow him examine other costing techniques such as historical costing and uniform costing e.t.c. The institute of Cost and Management Accountant defines Standard Costing as a “predetermined cost which is calculated from management standard of efficient operations and relevant necessary expenditure”. The usefulness of information provided from the analysis of variance related to standard costing has been challenged. Attention to quality some critics say is inadequate. Others have proposed that quality considerations can be incorporated into standard costing (See Cheatham and Cheatham, 1996).

On the other hand, Absorption costing is a method for appraising or valuing a firm’s total cost including all manufacturing costs as product costs, regardless of whether they are variable or fixed and therefore it is frequently referred to as the full cost method. (Seiler, 1959; Chandra and Paperman, 1976; Lal and Srivastava, 2008) though confronted with the problem of arbitrary apportionment of fixed cost. While under variable costing, only those manufacturing costs that vary with output are treated as product costs. This would usually include direct material, direct labor, and the variable portion of manufacturing overhead. Variable costing is sometimes referred to as direct costing or marginal costing. Fixed manufacturing overhead is treated as period cost just as selling and administrative expenses. Thus in inventory valuation or in cost of goods sold fixed manufacturing overhead is not treated as product cost in marginal costing technique. (Seiler, 1959; Chandra and Paperman, 1976; Lal and Srivastava, 2008; Swamidas, 2000)

1.1 Statement of the Problem

From the background of our study above and brief review of relevant literature the following problems were identified:

There is widespread complain that traditional cost accounting techniques such as standard costing ,marginal costing and absorption costing have been found obsolete and deficient for today demand and greater cost accuracy
Managers and Accountants are confused about which of the costing techniques to use which will ensure effective cost control and will enhance effective management decision

Inadequate knowledge as to whether or not quality considerations can be incorporated into each of those costing techniques

The assignment of indirect costs to products, departments, and other cost object has been a long standing problem in cost accounting

1.2 Research Objectives

The main objectives of this research is to determine the following

  1. The degree of usefulness of different managerial/cost accounting techniques (marginal costing, standard costing and absorption costing).
  2. To find a long lasting solution to the problem of apportionment of indirect cost
  3. To carry out an empirical study to ascertain whether our traditional costing techniques are still relevant for today’s demand and greater cost accuracy.
  4. To know if quality consideration can be incorporated into each of the costing techniques.
  5. To know which of the costing technique is most effective for cost control and will enhance management decision.

1.3 Research Questions

Some burning issues on the researchers mind will be looked at critically with the hope of proffering solutions to them and are as follows:

  1. What is the most appropriate basis for the apportionment of fixed cost
  2. Are traditional costing techniques still relevant for today’s demand and greater cost accuracy.
  3. Which of the costing techniques is most effective for cost control and will enhance management decision.
  4. Can quality consideration be incorporated into each of the costing techniques.

1.4 Research Hypothesis

In other for our study to be properly guided, the following null (Ho) and alternative hypothesis (Hi) have been formulated:

Hypothesis One:
  • Ho: Traditional costing techniques are not relevant for today’s demand and greater cost accuracy.
  • Hi: Traditional costing techniques are relevant for today’s demand and greater cost accuracy.
Hypothesis Two
  • Ho: Quality consideration cannot be incorporated into traditional costing techniques
  • Hi: Quality consideration can he incorporated into traditional costing techniques.

1.5 Scope and Limitations of the Study

This section explores the confines within which our research will be carried out and the circumstances beyond the researcher’s circumstances which might affect our study. This research will explore our traditional costing techniques such as standard costing marginal costing and absorption costing to the fullest while the researcher will use Coca-Cola Bottling company as the case study from which the population for our research will be examined.

In addition, constraint such as limited lime, inadequate finance and inability to recover all questionnaires used in gathering data might he encountered and this might have a negative impact on our study. However the researcher will put in his best in ensuring a worth while research is conducted.

1.9 Significance of the Study

The major objective of management in any organization is to minimize cost and maximize profit by avoiding wastage of resources.

This research will however be of interest to Nigeria’s manufacturing industry as it will:

  1. Enlighten on how best to minimize the cost of production through effective cost control while maintain the quality of her output
  2. Show us how to judiciously utilize our scarce resources in other to avoid wastage
  3. It will help the sector to be quality driven which will increase customers patronage
  4. Enhance the productive capacity of the sector so that her contribution to the GDP ( Gross Domestic Product) will be significant to accelerate the pace of economic growth and development

1.10 Historical Background of Case Study

The Coca- Cola Bottling Company is an American multinational, retailer and marketer of non alcoholic beverage concentrates and syrup which has its headquarters in Atlanta Georgia. The company is best known for its flagship product Coca-Cola, invented in 1886 by Pharmacist John Smith Pembemton in Columbus Georgia.

The Coca-Cola formula and brand was Bought in 1889 by Asia Candler who incorporated the company in 1882.Beside its namesakes Coco-Cola beverage, Coca-Cola currently offers more than 500 brands in over 200 countries and serves over 1.7billion people each day

Tab was Coca-Colas first attempt to develop diet soft drink using Saccharin as a sugar substitute introduced in 1963l, the product is still sold today, although its sales have swindled since the introduction of Diet Coke. The company also produces a number of other soft drinks. During the 1990s, the company responded to growing consumer’s interest in healthy beverages by introducing several new carbonated beverage brands. These includes: Minute Maid, Juices to go. Powerade Sports beverage flavored tea Nestea (in Joint venture with Nestea) etc.

1.11 Definition of Terms

Marginal Costing:

The C. I.MA London defines marginal costing as “a techniques of costing which aims at ascertaining marginal costs, determining the effects of changes in costs, volume, and price on the Company’s profitability, stability etc. and furnishing the relevant data to the management for enabling it to take various management decisions by segregating total costs into variable and fixed costs.”

Standard Costing:

Standard Costing is a technique of cost accounting which compares the standard cost of each product or service with actual cost to determine the efficiency of the operation, so that any remedial action may be taken immediately.

Absorption Costing:

Absorption Costing is also termed as Full Costing (or) Orthodox Costing. It is the technique that takes into account charging of all costs both variable and fixed costs to operation

Direct Cost:

These are cost that are easily traced to a product or cost unit to a cost center or some specific activity e.g cost of wood for making furniture. It is also called traceable cost

Indirect Cost:

These are difficult to trace to a single product. They are common to sever al products e.g. Salary of a factory manager. It is also called common cost.

Chapter Five

Summary, Conclusion and Recommendations

5.0 Introduction

This chapter summarizes, concludes and recommends on the findings obtained from the study. It also highlights on the limitations of the study and suggests areas for further research.

5.1 Summary

This study sought to find out the cost management strategies which are applied by manufacturing companies trading in the Nigeria Securities Exchange (NSE). We have also tried to establish the relationship between cost management strategies and financial performance of manufacturing companies in the NSE. Specifically, we have attempt to ascertain the effect of cost management strategies on the financial performance of manufacturing companies From a review of the questionnaires presented and used to sample respondents, we were able to find out that all the sampled institutions employed cost management strategies within their organization to a large extent. When it came to cost management, majority of the manufacturing companies preferred to depend on future forecasted total costs. From the research work conducted, we were able to ascertain that indeed low stock cost increases financial performance. Through this we could be able to ascertain that indeed stock cost and financial performance have a relationship which exists. With certainty, we could gather from the findings that the managed cost of the stock had a positive impact on the financial performance of these manufacturing companies.

The institutions employed different cost management strategies such as just in time production of stock, economic order quantity method and safety stock above the normal quantity method. Majority of the firms employed the economic order quantity method and it bore fruits in that it had a positive impact on the financial performance of these organizations. The cost of labor employed in these organizations was also reviewed in a bid to find out whether there existed any relationship between the cost of labor and financial performance. The different manufacturing companies were quite affirmative that indeed the cost of labor directly impacts on their financial performance. The companies also illustrated that to a high extent, the cost of labor had a positive effect on the financial performance. They indicated that to a low extent did the cost of labor have a negative effect on the financial performance.

The manufacturing companies indicated that a threat to their operations and to the advancement of their financial performance was high distribution costs. The manufacturing firms indicated that automation of the production process, retrenchment of unproductive staff and replacement of high salaried employees with low salaried ones had a positive impact on financial performance. They indicated that if the remuneration policies regarding salaries and wages changed, they would have a negative impact on their financial performance. They indicated that they indeed utilized ratios in measuring their profitability and the ratios employed were return on assets and return on equity. Majority of the manufacturing firms found return on equity to be a better measure of profitability as compared to return on assets.

5.2 Conclusion

Majority of the manufacturing companies in their daily operations are usually challenged by cost management. Some organizations have allocated and entire department with smaller cost departments to try and deal with the issue of cost management. The manufacturing companies have come to find out that to a great extent cost management has a direct impact on the financial performance of these organizations. An increase in the different costs which the organization has to deal with results in their financial performance being negatively affected. A prudent organization which is able to manage its costs is able to effectively improve its financial performance.
Throughout the study, I sought to establish the cost management strategies used by manufacturing companies. I also sought to find out the effect which these cost management strategies had on financial performance of the manufacturing companies. Specifically, the researcher wanted to investigate whether a relationship did exist between the cost management strategies and the financial performance.

5.3 Recommendation Policy and Practice

Based on the results of this study I recommend company policy makers and transaction advisors should be keen on making cost management policies to be applied since they greatly impact on financial performance of the company.

Company policies regarding to financial performance of companies should incorporate various cost management strategies since they greatly impact financial performance.

Financial policies regarding cost management strategies should be formulated and be used keenly and with a lot of controls to avoid critical financial looses.

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