EFFECTS OF STANDARD COSTING ON THE PROFITABILITY OF MANUFACTURING COMPANIES (A CASE STUDY OF NIGERIAN BREWERIES PLC)

ABSTRACT

The topic of this research is effects of standard costing on the profitability of a manufacturing company. The purpose of this study was to discover if the application of standard costing techniques have any effect on profitability, to explore the relationship between standard costing and the profitability of manufacturing companies and also to determine whether standard costing techniques and principles are being adopted and practiced in Nigerian manufacturing companies (Nigerian breweries, Ama Eke, Udi local government of Enugu state). The design of this study is descriptive survey method and the study was conducted at Nigerian breweries, Ama which is the case study of this research work. The instrument of data collection was analyzed using the chi-square method. The researcher discovered the following as her data findings that proper accounting records are kept and are significantly necessary in the management of the company. That the company employs standard costing in costing their product and decisions are made with the standard costing information obtained in the company. That accounting reports are prepared and presented to the company’s management and that actions are taken promptly on the information given in the report. That effective application of standard costing has effect on the profitability of the company. That the company benefit in a significant way through the use of standard costing especially in the improvement of profit. The researcher came to a conclusion that standard costing is widely used in Nigerian manufacturing companies and that standard costing enhances adequate planning, control and decision making processes in the company. That standard costing aids manufacturing companies in the elimination of unprofitable products, provision of costing information and cost control.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The effect of standard of standard costing on profitability has been a problem to manufacturing companies in Nigeria. The standard costing as a tool for either improving or not improving profitability. Unlike its contemporaries in the field of science, it deals with human beings and calculation significant information.

Lucey (2002) defines standard costing as a technique which establishes pre determined cost estimates of the cost of products and services and then compares these pre determined costs with actual costs as they incurred. Standard cost represent am estimated or pre determines total cost of product per unit for an organization. Adeniji (2009) argues that the process of estimating the total cost of production per unit is described as standard costing technique.

Standard costing as a long established concept is the management function of planning and control. In effect, yardstick has been of vital importance for planning and control exercise. As a matter of fact, problems associated with production and earning a profit was recognized for many years before the concept of standard costing was invented. Standard costing appeared in the early twentieth century when transaction volumes were overwhelming the record keeping system in the use at that time. Since then, prevalent use of computer systems and automated data entry systems have reduced the need for standard costing, though not entirely eliminated.

These standard costs reveals goals, spur actions and efforts for effective management and equally provide checks such that exceptional profit oriented goal performance can be achieved and the reserve adequate punishment to be exercised for bad performance. Standard cost cause appraisal to be made over production facilities and form management intentions and capabilities and is a first step strength and weakness appraisal. These led to the preference of standard costing system in 1920’s. it was brought into the system such that total variances might be accumulated as well as detailed variances.These steps gave rise to formal expression that significant costs were not actual and historical cost but standard or planning cost and their variances.

1.2 STATEMENT OF THE PROBLEM

In Nigeria today, the economy is extremely bad. In this respect, a lot of measures have been taken to measure the destining economic situation. Among the measures taken to revamp the economy includes;

Structural adjustment program (SAP)

Second tier foreign exchange market

Ban on importation etc

These measures have adverse effect on the buying attitude of the consumers. Cost of production has increased in manufacturing sector of the economy which in effect has resulted to high prices of manufacturing goods. In effect, no applicable level of demand could be recorded by most manufacturers as the buyer’s purchasing power could no longer meet up with the rising price level. Most of the manufactured products were consumed by civil servants, public servants and other wage earners whose take home pay pocket can no longer take them home. In this regards, consumers utilize their little purchasing power mainly on foodstuff to sustain themselves first before luxury. With the economic reason, greater efforts should be made to keep cost to the lowest minimum through efficient and effective utilization of both human and material resources. The above mentioned does not end it up, more problems still come up from such areas like;

1. Irregular supply of water: The power holding company of Nigeria (PHCN) does not render adequate services to manufacturers. PHCN will take off power and the production would stop unscheduled thereby resulting to much damages which the costs are added to cover all productions.

2. Inadequate supply of water: water is always in short supply and in most cases, water board does not supply water manufacturers need it. The manufacturers resort to buy water needed for their production from the open market to see the manufacturing activities are going on. In this respect, the price of getting water is costlier than from water board in most cases, whether water is supplied or not, water board will require them to pay a reasonably monthly water rate.

3. Bad roads: in respect of transporting raw materials used from the extraction area and evacuation of finished goods from the manufacturing industry to the market where it is demanded, high transport costs are made due to bad roads in Nigeria with special reference to Eke, Udi LGA of Enugu state in particular.

4. Foreign competition: most of the indigenous manufacturers are not given protection from foreign competitors and in most cases are deprived of tax holidays.

1.3 OBJECTIVES OF THE STUDY

While carrying out this research, the following aspects were borne in mind;

1. To discover if the application of standard costing techniques have any effect on the profitability of manufacturing companies.

2. To explore the relationship between standard costing and profitability in manufacturing companies in Nigeria.

3. To determine whether standard costing techniques and principles are being adopted and practiced in Nigerian manufacturing industries.