MARGINAL COSTING AS AN ESSENTIAL TOOL FOR DECISION MAKING IN A MANUFACTURING COMPANY (A CASE STUDY OF EMENITE LTD ENUGU)

CHAPTER ONE

1.0     INTRODUCTION

1.1  BACKGROUND OF STUDY

       The basic 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 work is a real attempt to investigate into the principle and practice of marginal costing as an essential tool for decision making in manufacturing companies as (a case study of Emenite  LTD Enugu).  

This study will critically examine the following:

-      The condition for analyzing cost into fixed and variable cost to components.

 -     How the cost are normally controlled.

-      And how management decision in aided under the      technique.

An appraisal is necessary in order to determine effectiveness and efficiency of the management accounting technique.  In carrying out this research work, data was got from questionnaire.

Information and analysis of the data, using the percentage method to analyze the response elicited from respondents. Also the personal observation methods were used, together with relevant information from libraries.

STATEMENT OF PROBLEM

1. How does marginal costing reduce the arbitrary allocation of production cost to cost centres?
2. Can production not be increase without increasing the amount of fixed cost?
3. When management is faced with two or more alternative choices of product, is marginal costing a useful tool for selecting or choosing the best alternative?

OBJECTIVES OF STUDY

       Marginal costing as an essential tool for decision making.  Marginal costing technique of cost accounting tends to separate cost into variables and fixed cost. The objectives of this study among other things are as follows:

-     An evaluation of the marginal costing technique towards ascertaining its effectiveness and efficiency.

-     To determine the condition for cost control and analysis

• Examine how management under this technique makes product decisions.
• Finding out any inherent deficiencies in its application.

RESEARCH QUESTION

The following research questions are asked.

• How did marginal costing help in the achievement of organizational goal.
• Does the principles of marginal cost aid prudent decision making in the management.
• Does the management understand easily the statement prepared using marginal costing techniques.

SIGNIFICANCE OF THE STUDY

Since, it is a technique of cost accounting adopted by an organization to measure its profitability, any effort geared towards establishing how the technique helps in the profit realization of the organization in worthwhile.

Since this relationship is reciprocal, any suggestion on the improvement of the costing principle should have some bearing on profit.

Its output or productively is to be enhanced, and profit maximized, a knowledge of cost behaviour and analysis into the various components is essential and worth undertaking.

Based on the findings of this study and the suggestions proffered, it is strongly hoped that attention to them would go a long way in improving the profit position of the firm.

1.6  SCOPE OF THE STUDY

       This researcher had difficulties in collecting all the relevant data required for an depth evaluation of this subject. This constraint emanated from the fact that the company is said to be a competitive manufacturing company concern and general manager considers its risk to issue out information required.

DEFINITION OF TERMS

MARGINAL COSTING: This  can be defined as a principle whereby variable cost are charged to cost units and fixed cost attributable to the relevant periods is written off in full against the contribution in that period.

MANUFACTURING COMPANY: This is were by raw materials  are acquired and intermediate goods and transfer them to finished goods through an industrial process. 

FIXED COST:Fixed cost is refer to as a cost that accrues in relation to the passage of time and which is certain output and turnover rates, tends to be unaffected by fluctuations in the level of activity.

Control cost: This is the aspect of cost that  the accountant use to control the cost of a firm or as the employment of the management devices.

Variable cost: This is a cost that exhibite a character  of both fixed and variable element.

Decision making: This is a process of studying and e valuating two or more available alternatives tending to a final choice.