EVALUATION OF THE RELATIONSHIP BETWEEN MARGINAL COST AND FINANCIAL PERFORMANCE OF BREWERY FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1. Background Of The Study

        Marginal costing is formally defined as the accounting system in which variable cost are changed to units and fixed cost of the period are written off in full against the aggregate contribution. Its special value is in decision making.

        The term marginal cost is sometimes refers as the marginal cost per unit and sometimes to the total marginal cost of the department or batch or operation. The meaning is usually clear from the context. The marginal cost of a product “is its variable cost” this is normally taken to be direct materials, direct expenses and the variable part of overheads.

        Walter (2002) sees marginal costing not as a system of cost ascertainment on the same lines as job, operating or process costing, but is rather a technique to deal with the effect on profits of changes in volume or type of output. He went further to explain that “fixed” in relation of time and in fact they tend to vary in relation to the length of the period covered.

        Recently the common concern to every participant in a market economy is the magnitude at which price of goods are multiplied in recent time in Nigeria. This is in addition to the multiplier effects associated with the process of transacting business in Nigeria for instance as customers complain bitterly of exorbitant prices likewise Brewery firmsremain worried about how profitability returns in the face of ever increasing competition. Even low buying power of customer, low capacity utilization and international market that are characterized by differentiated products. As a result customers shift from one product to another in search of value that rarely comes despites their reaches to purchase. They are all confronted with higher price low quality adulteration and at times temporary scarcity in place of value for money objectives they pursue. The management of different companies also seeks for cover everywhere to justify low profitability return while trying to checkmate competition and its resultant effect on financial performance caused by product proliferation and limitations.

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 marginal cost and financial performance of brewery firms in Nigeria.

1. Statement of the Problem

The problem with calculating the contribution of various products made by a company is that it may not be clear whether the contribution earned by each product in enough to cover fixed cost where as by charging fixed overhead to a product we can decide whether it is profitable or not.

This research is primarily carried out by marginal cost elements available to some Brewery firms in Nigeria more also it goes ahead to relate the financial performance of these Brewery firms to direct material direct labor and overhead respectively. Hence the research aims at evaluating financial performance of brewery firms using the marginal cost element as a yard stick.

Marginal costing is a techniques used in reporting costs and profit of a firm. There should be separation of cost into fixed and variable costs. In marginal costing product cost include variable production cost such has direct material, direct labor, direct production overhead expenses. It ignores fixed cost and semi-variable cost. The separation of cost into fixed and variable cost is difficult, in reality manufacturing can’t take place without plant facilities and equipment hence fixed manufacturing cost are part of the production and should not be excluded.

Marginal costing fail as to take into consideration that in the long run, fixed cost will be part of the total cost of production than of a unit of an item. It is therefore not an appropriate tool in making pricing decision of a firm.

In the preparation of profit and loss account, the use of marginal cost is limited to the internal parties of a firm such as the management. In computing profit for tax purpose, marginal costing is not accepted method, because it does not include all cost used in production process. Therefore in preparation of profit and loss account meant for external uses such as shareholder investors, government and the public, using marginal costing will not present true and fair view of the financial affairs of the firm.

1.3 Objectives of the Study

The aim of this project work is to evaluate the relationship between marginal cost and financial performance of brewery firms in Nigeria. The general objective of this research work includes the following;

1. To evaluate the relationship between raw material cost and Return on Investment of Brewery firms in Nigeria.
2. To examine the relationship between direct Overhead Cost and the Return on Investment of Brewery firms in Nigeria.
3. To identify the correlation between Direct Labour Cost and the Return on Investment of Brewery firms in Nigeria.

1.4 Research Questions

1. To what extent does raw material cost relate with Return on Investment of Brewery firms in Nigeria?
2. What is the extent of association between Direct Overhead Cost and the Return on Investment of Brewery firms in Nigeria?
3. To what extent does Direct Labour Cost relate with Return on Investment of Brewery firms in Nigeria?
4. Research Hypotheses

Ho: Raw material cost does not have significant relationship with Return on Investment of Brewery firms in Nigeria.

H1: Raw material cost has significant relationship with Return on Investment of Brewery firms in Nigeria.

Ho: Direct Overhead Cost does not have significant relationship with Return on Investment of Brewery firms in Nigeria.

H1: Direct Overhead Cost has significant relationship with Return on Investment of Brewery firms in Nigeria.

Ho: Direct Labour Cost does not have significant relationship with Return on Investment of Brewery firms in Nigeria.

H1: Direct Labour Cost has significant relationship with Return on Investment of Brewery firms in Nigeria.

1. Significant of the study

This research work on the relationship between marginal cost and financial performance of brewery firms in Nigeria will be of immense importance to students in accounting firms, as it will serve as an eye opener to them. The study will also be of great importance to brewery firms in Nigeria since this research work will investigate the relevance of marginal costing on raw material cost, Direct overhead and direct labour cost.

1. Scope And Limitation Of The Study

This research work is central on the effect of marginal cost element on the financial performance of Brewery firms specifically raw material cost, direct overhead cost and direct labour cost and will endeavor  to show all relevant information that will enhance the actualization of the research objectives put into place. The researcher would have carried out research work into a big and well known company but for the constraints that confronted there she limited her research works to the nearest brewery firms specifically.