THE IMPACT OF STANDARD COSTING ON PROFITABILITY AND MANAGERIAL EFFECTIVENESS OF A MANUFACTURING INDUSTRY
A CASE STUDY OF FERDINAND INDUSTRIES LIMITED, URULLA IDEATO NORTH LOCAL GOVERNMENT AREA OF IMO STATE, NIGERIA
This research work will treat in detail the impact of standard costing on profitability and managerial effectiveness of a manufacturing industry. It will also take into account what standard cost does and the check it provides or control such that exceptional profit oriented goal performance can be achieved and on the reverse, adequate punishment to be exercised for bad performance.Chapter one of this work is going to discuss the brief history of the case under study, statement of the problem, purpose of study, significance of the problem, scope of the study, limitations of the study, assumption of the study.In Chapter two, the researcher will deliberate on the standard costing and overview, characteristics of standard costing, advantages and disadvantages of standard costing, essential features of standard costing, standard cost card, types of standard costing, setting standard, revision of standard etc and the areas standard costing helps in improving management efficiency.Chapter three will consider design and methodology, selection of data and analysis, presentation and data analysis, test of hypothesis and interpretation of result.Finally, chapter five will contain the summary of findings, conclusion from the study, recommendations and suggestions for further research.
CHAPTER ONE: INTRODUCTION
1.1 Brief Historical of the Case under study
1.2 Statement of the problem
1.3 Purpose of the study
1.4 Significance of the study
1.5 Scope of the study
1.6 Limitation of the study
1.7 Assumption of the study
1.8 Research Hypothesis
1.9 Definition of terms
2.1 Standard Costing and Overview
2.1.1 Characteristics of Standard Costing
2.1.2 Misconception of standard costing
2.1.3 Criticism of standard costing
2.1.4 Advantages of standard costing
2.1.5 Disadvantages of standard costing
2.2 Essential features of standard costing
2.2.1 Standard Cost Card
2.2.2 Type of Standard
2.2.3 Setting standard
2.2.4 Revision of Standard
2.3 Accounting Variance
2.4 Controllable and Uncontrollable Variance
2.5 Favourable and Unfavourable Variance
2.6 Areas Standard Costing helps in improving management efficiency
3.0 Design and Methodology
3.1 Selection of Data
3.1.1 Primary Data
3.1.2 Secondary Data
3.2 Collection of Data
3.3 Tools of data Analysis
3.4 Reliability of data
4.0 Data presentation and analysis
4.1 Presentation of data
4.2 Analysis of data
4.3 Testing Hypothesis
4.4 Interpretation of result
5.0 Summary of findings
5.1 Summaries of findings
5.2 Conclusion from the study
The impact of standard costing on profitability and managerial effectiveness of a manufacturing industry. The standard cost reveals the goals, spur actions, and provide check or controls such that exceptional profit oriented goal performance can be achieved and on the reverse, adequate punishment to be exercised for bad performance. Standard costs cause appraised to be made over production facilities and from management intentions and capabilities and is a first step in strength and weakness appraisal.There also led to the preference of standard costing to other methods with the development of standard of standard costing system in 1920s, it was brought into the accounting system that total variances might be accumulated as well as detailed variances.It is believed that standard costing helps management to plan for future, and if any justification is required for this project on the effects of standard costing on profitability’s and managerial effectiveness of a manufacturing industries.Firstly, the financial management should penetrate into every cranny of the enterprise and indoctrinate all management in their working habits. Secondly, cost should be given the maximum attention while emphasis on the effects.Finally, since revenue less cost gives balance profit, the profit should be increase as it is what industry is aiming at.
The impact of standard costing on profitability and managerial effectiveness of a manufacturing industry. The standard costing as a tool for either improves or not improving profitability and managerial effectiveness. Unlike its contemporaries in the field of science, it deals with human beings and calculating significant information. 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 facts, problems associated with production and earning a profit was recognized for many years before the concept of standard costing was invented.
One of the earlier attempt at costing was by James Dodson. He showed how the books were kept by a shoemaker ranging from this period onwards, there was a steady development of costing developed in the time of our early scientific management proponents such as Fredrick W. Taylor, Henry Fayol and others.
These standards cost reveal goals, spur actions and efforts for effective management and equally provide checks such that exceptional profit oriented goal performance can be achieved and the reverse adequate punishment to be exercised for bad performance. Standard costs 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 to other method. With the development of standard costing system in 1920s, it was brought into the accounting 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 costs and their variances.
1.1 BRIEF HISTORICAL BACKGROUNDS:
Ferdinand Industries Nigeria Ltd is a company used in this study. This company is located at Urualla in Ideato North Local Government Area of Imo State of Nigeria. It is a limited liability company incorporated in1975. The management of industries is made up of:
(i) Executive Directors
(ii) General Manager
(iii) Factory and department managers and other employees.
(iv) Other employees.
The company has two major operational industries used for this project, which includes:
1. Ferdinand Aluminium Manufacturing Industry
2. Ferdinand Filters Manufacturing Industry.
Ferdinand Industries Nigeria Limited started operation with initial capital base of seven hundred and fifty thousand naira (N750,000.00) as the authorized and subscribed capital. This initial capital base does not include loans obtained from financial institutions and assets obtained on lease, subject to gradual payments. Ferdinand Group of Companies Plc are subsidiaries while Ferdinand Group of Company Plc is a holding company housing these industries and others.
Ferdinand aluminium manufacturing industry started operation fully in 1975 with staff strength of two hundred workers made up of male and female. This industry is headed by a manager who takes directives from the executive director.
Ferdinand aluminium manufacturing industry produces a range of high quality aluminium domestic and cooking utensils which include:
(i) Heavy gauge luxury castrates
(ii) Fry pans
(iv) Luxury aluminium plates
(v) Luxury aluminium cups
(vi) Luxury aluminium bowels with cover
The above enumerated products are produced in sets, and their brand name is ‘Touch’ the emblem of the products bears a ‘Touch’ as the trade mark.
The staff of Ferdinand Aluminium Manufacturing industry is trained under the expertise acquired from A.I kalogeros (export) Limited, Cyprus.
The raw material used for production by this industry is got locally. It is obtained from Aikan Aluminium or first Aluminium Plc, Port Harcourt.
Ferdinand Filter Manufacturing Industry started operation in 1982 with staff strength of two hundred male and female workers. The industry is headed by a General Manager who takes directives from the executive director.
Ferdinard Filter Manufacturing Industry produces high quality and high performance Ferdinand Soparies automotive filters used by different motor vehicle and industrial plants. The staff of Ferdinand filter manufacturing industry are trained under the expertise acquired from Soparies Company Limited: a company based in France. Among the different types of filters produced include:
(a) Opinion Filter
(b) Element filter
(c) Special filter and
(d) Air cleaner
The above enumerated products are produced in different branches and sizes and below is the detailed analysis of the different types of filters produced.
(a) Opinion Filters
(i) CV 325
(ii) CV 379
(iii) CV 394
Vox wagen cars such as Santana Passat
This type of filter is called opinion because it is designed in a manner that it is fixed in a vehicle by spinning or screening inside to get balanced. It is used for filter oil that gets into engine. The cuter cover of spinion is made of thick gauge metal.
(b) Element Filters
Mercedes benz lorries
Mercedes benz lorries (new model)
Mercedes benz lorries buses
This type of filter is cylindrical in nature with thick gauge perforated paper cover or light gauge perforated metal cover. The two heads are sealed with un-perforated thick gauge paper or metal.
(c) Air cleaner Filters
Air cleaner is designed in the same manner with element filter.
(d) Special filter: Special filter is specially designed for industrial plant. NAFCON, NNPC, and DELTA STEEL etc. Some of the raw material used for manufacture of Ferdinand soparis automotive filters are got locally and some imported. The filter is made of many components which includes:
1. Filter paper: This is of different types, which include oil paper, fuel paper and air paper.
2. Metal: This is of different gauges or thickness ranging from 0.25, 4, 5, 6mm etc. to 3mm are used for spinion outer cover.
3. Gaskets: This is of different types, which include: rubber gasket and paper gaskets.
4. Special Gums: It is used for the end covers of the filers and is called “plastisol”. There is also colour plastisol used for special filters.
5. Springs and Gauge: They are of different sizes.
6. Paints: For colour such products like the spinions such a paint is called Ferdinand blue, is used to differentiate Ferdinand products from other products.
7. Printing materials such as white ink
8. Packets: Is for packaging of produce/filer.
9. Cardboard papers: Use outer shape of filter of paper cover.
1.2 STATEMENT OF THE PROBLEM:
In Nigeria today, the economy is extremely bad. In this respect, a lot of measures have and are being taken to better the destining economic situation. Among the measures introduced to revamp the economy include:
(a) Structural adjustment programme (SAP)
(b) Second-tier foreign exchange market.
(c) Foreign exchange market
(d) Bank on importation
(e) Ban on importation etc.
This measures have had and still having adverse effect on the buying attitude of the consumers. Costs of production have increased in manufacturing sector of the economy, which, in effect, has resulted to high prices of manufacturing goods. In respect, no applicable level of demand could be recorded by most manufacturing, as the buyer’s purchasing power could not longer meet up with the rising price levels. Most of the manufactured products are consumed by civil servants, public servants and other wage earners whose take home pay pockets can no longer take them home. In this regard, 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 costs 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 other areas like:
(i) Irregular supply of power: The Nigerian Electrical Power Authority (NEPA) do not render adequate services to manufacturers. NEPA will take off power and the production operation will stop unscheduled thereby resulting to much damages which the cost is added to cover all production.
(ii) Inadequate supply of Water: Water is always in short supply and in most cases, water board do not supply water when manufacturer needs it in effect. The manufacturer resort to buy water needed for their production from open markets to see that manufacturing activities are going on. In this respect, the price of getting water from open market is costlier than that from the water board and in most cases whether water is supplied or not water board will require you to pay a reasonable monthly water rate.
(iii) Bad Roads: In respect of transporting raw materials used, from the extraction area and evacuation of finished goods from manufacturing industry to the market where it is demanded, high transport cost are made due to bad roads in Nigeria with special reference to Imo State and Ideato North in particular.
(iv) Foreign Competition: Most of the indigenous manufacturers are not give protection from foreign competitors, and in most cases are derived tax holiday.
There has been decreased profitability resulting from increased costs. In effect, requires greater cost reduction and profit optimization. This can only be achieved through setting reliable standards, ensuring that such standards are mentioned and variances not adversely very large (significant) without proper cause. The system helps cost reduction to increase profitability.
Another major problem centers on lack of adequate control of scarce resources by indigenous manufacturers. Most of the resources used, requires special storage facilities. Where they are stored before they are utilized to avoid spoilage. In most cases, the storage facilities may be beyond the reach of some manufacturers. Along the line, most manufacturers do not have adequate control over these resources, as they are easily impact upon by government. Polices may be favourable or unfavourable to manufacturers. To Nigeria, there can be evidenced to restrictions and total ban as most of them are imported.
Indiscipline in most industries is one other major problem encountered in realization of targets (standards strikes and work to rule actions contribute immensely to increase costs for the period as the production level did not get to the expected target.
The use of unqualified and inexperienced accountants by some industries pose greater problem to such industries for the accountants cannot adequately apply the accounting techniques required of them on standard costing.
Regarding this, objections to standard cost are attributed to employment of inexperience staff and the presentation of figures, which are difficult to interpreter.
Top management ignorance and lack of support of accountants recommendations on standard costing hinders improvements of the management. A lack of education on the use of accounting as a tool of management is very evident.
1.3 PURPOSE OF THE STUDY:
While carrying out this research, tow broad aspects are borne in mind, which includes:
(a) Establishing a framework that would guide accountants and managers in the employment of standard costing.
(b) To know the extent standard costing principles adopted are used in practice in Nigeria business management.
The emphasis has been placed on the employment of the techniques as a tool of management toward profit orientation and to be an integral body of business management. The various uses of the object of this research work, in effects, it is to identify the possibility of standard costing or profitability and managerial effectiveness and their possible relationship. Provide possible solutions and based on the findings, make recommendations for effective management.
1.4 SIGNIFICANCE OF THE STUDY:
It is believed that standard costing aids management to plan for the future, and if any justification is required for this research project on he effect of standard costing on profitability and managerial effectiveness to manufacturing industries, the view of Robert Appleby. One of the early British industrialists should be released on. Appleby regards the key to managerial success as the setting of standards for all business activity and measurement of performance against the standard.” He states that financial measurement should penetrate into every cranny of the enterprise and indoctrinate all managements in their working habits. In this regard, there is the need to prove whether standard costing is more variable and preferable option to other costing methods adopted for each product produced. There is a limit to the price charged for the production.
In effect, costs should be given the maximum attention. In his manner, since revenue less cost gives balance of profit should be increased, as it is what every industry is aiming at.
1.5 SCOPE OF THE STUDY:
This research project centers on the manufacturing industries of Ferdinand Nigeria Limited, Urualla in Ideato North Local Government Area of Imo State. The purpose is to accommodate the accounting needs of the operational division of the management. In the effort to validate, the hypothesis of this project, respondents were mainly the executive director, general managers, Accountants and some other accounting officers in charge of costs in the industries.
1.6 ASSUMPTIONS OF THE STUDY:
Some useful assumptions are made in the course of the research which includes:
(i) Standard costing is set: It remains unchanged as long as the method of operation and basic prices used to set them remain the same.
(ii) Standard costing is operational.
(iii) Management is furnished with periodic analysis of differences between causes and operational divisions responsible.
(iv) Within the management, there is an established arrangement that enables prompt investigation and action to be taken on on-profit oriented or adverse significant variances.
(v) The Management system, should not be regarded as to allow the standard costs to be amended at intervals where need arises.
1.7 RESEARCH HYPOTHESIS:
As this project work progresses, before it is rounded off, it would prove if there exists any relationship between standard costing on profitability and managerial effectiveness. If standard costing is a more reliable option to other costing methods employed to improve profitability and managerial effectiveness.
To this effect, the following hypothesis will be set and will be tested.
i. Hi: Improvement on profitability and managerial effectiveness has much to benefit by employing standard cost techniques.
ii. Ho: Accurate standard costs is not an appropriate tool of measuring profitability and managerial effectiveness in the form of realistic profits.
iii. Ho: Standard costing technique leads to immediate detection of inefficiency.
iv. Hi: Standard costs produce realistic profit which is a true measure of profitability and managerial effectiveness.
v. Hi: Standard costs produce realistic profit, which is a true measure of profitability and managerial effectiveness.
vi. Ho: Standard costing techniques does not spur management for greater level of profitability and managerial effectiveness. In addition to the above hypothesis, more may be formulated and their validity ascertained in chapter four, dealing on data presentation and analysis and interpretation of the research work.
1.8 DEFINTION OF TERMS:
The concept of standard costing as predetermined or forecast estimates of cost is wide and varied. The area covered in this research work is dynamic and contains several terms for effective communication, the terms used in this research work intends to have the same understanding with the definition of standard cost by institute of cost and management accountants (ICMA) as “the predetermined cost calculated in relation to prescribe set of working condition. Co-relating technical specifications and scientific measurement of materials, labour to the prices and wages rate expected to apply within the period which the standard relates with an addition of appropriate share of budgeted overhead. Its main purpose is to provide basis for control through variances accounting for the valuation of stocks and work-in-progress, and exceptional cases for fixing selling prices.”
(a) Standard Costing: Implies setting up standard costs for goods and services.
(b) Standard hour: Refers to the quality of output or amount of work, which should be performed at a specific time, normally in one hour.
(c) Variance accounting: Is an account that centers on future planning activities of an organization, as compared with the historical activities, the activities being expressed in budgets, standard costs, standard selling prices, standard profit margins and the differences between those and the comparable actual results to be accounted to the management periodically and the responsibility centers, the analysis centering on the operating profit variance.
(d) Variance analysis: It is concerned with section of the variance accounting that relates to the analysis into constituent sections of variances between planned and actual performance.
(e) Cost Variance: It refers to the difference between the standard cost (planned) and the comparable actual and historical cost incurred during a specified period.
(f) Seasons Variance: Is that portion of the volume variance which is due to the difference between the seasonally budgeted output and the average output on which standards have been calculated (the sum of the seasonal variations over a complete year would be zero).
(g) Controllable Variance: It is a cost variance, which can be identified as the primary responsibility of specified person.
(h) Sales Variance: Is the difference between budgeted value of sales and the actual value of sales achieve in a given period.
(i) Profit or loss Variance: Is the difference between the budgeted or planned profit or loss and the actual profit or loss. Is to comprise the sum of variance appropriate to standard cost of sales? The sales margin variances, and variances on any charges, which have not been, included in the standard cost of production.
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