MARGINAL COSTING AS A TOOL FOR MANAGEMENT DECISION MAKING

Abstract

The project titled “marginal costing as a tool for management decision making” a case study of ANAMMCO Ltd Enugu, was undertaking to evaluate marginal costing techniques to wards ascertaining its efficiency and effectiveness. The researcher reviewed literatures done by other authors for the purpose of this study. Data were collected from questionnaire and other information gathered were presented on tables, analyzed and conclusion drawn from percentage variations. The research findings includes marginal costing techniques is well adopted by ANAMMCO as a result of its efficiency and effectiveness in operation. The response conclude that this techniques is very essential in organization, though no particular costing technique is in itself a lasting panacea to all organizational ailment or problems but depends on what the management needs. The researcher recommends for the provision of raw materials in advance, which will assist in reduction of customers dissatisfaction.

CHAPTER ONE

INTRODUCTION

1.1  Background of Study

The reality of modern business management in a free enterprise economic system is the level of competition among all the enterprise, where only the fittest enterprises survive.  The measure objective of every organization is profit maximization. This could be achieved through? The involvement of costing methods that should assist in decision making of make buy. 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. The research 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 using Anambra Motor Manufacturing Company (ANAMMCO) as a case study.  The study will critically examine the following:

–      The condition for analyzing cost into fixed and variable 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. Against the background of rapid economic growth, the Federal Military Government in 1975 was faced with the enormous task of developing the country’s infrastructure from one geared toward peasant farming to one oriented towards mechanized agriculture and industry. The Anambra Motor Manufacturing Company is the result of the economic and technological co-operation between the government and the people of Nigeria and DAIMLER-BENZ AG OF West Germany.  The company is located at Emene Industrial layout, Enugu.  The site covers an area measuring over 300,000 square meters generously leased by the state government.

1.2  Statement of Problem

In this study we are to answer the questions listed below:

a.          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?

1.3  Objectives of Study

Marginal costing as a tool for management decision-making.  Marginal costing technique of cost accounting tends to separate cost into variables and fixed components.  Bearing this in mind, the objectives of this study among other things include

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

2.  Finding out any inherent deficiencies in its application.

3.  To determine the condition for cost control and analysis

4.  To Examine how product decisions are made by management under this technique makes.

1.4  Research Questions

1.    How effective and efficient is marginal costing?

2.    What are the challenges of the marginal costing?

3.    What conditions apply in profit determination using marginal costing?

4.    In what way can product decision of make-buy be made by management?

1.5  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 technique should have some bearing on profit improvement. It 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 the profit will improve.

1.6  Scope of the Study

This study is limited to the survey of how the marginal costing technique is used to make decision at the Anambra Motor Manufacturing Company (ANAMMCO) and how effective and efficient it is to the company.  This investigation is not to be taken as an exhaustive piece.

1.7  Limitation 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 (ANAMMCO) is said to be a competitive manufacturing company concern and the General manager considers its risk to issue out information required.

1.7  Definition of Terms

Manufacturing Industry: A manufacturing industry is one that acquires raw materials and intermediate goods and transfer them to finished goods through an industrial process.  The definition satisfies the purpose of this study.  A manufacturing industry can also be defined as one where pre-occupation is the processing of materials into other goods through the use of labour and factory facilities.

Marginal Cost:  Marginal cost is the amount at any given volume of output by which aggregate cost are changed of the volume of output is increased or decrease by one unit. The marginal cost of a product is alternatively known as its variable cost, which includes direct material, direct labour and direct experiences and the variable part of overheads.

Marginal Costing: Marginal costing is defined by CIMA’S officials terminology 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”.

Fixed Cost: Fixed cost is a cost that accrues in relation to the passage of time and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the level of activity. It is treated as period cost and are charged in full to the profit and loss account of the accounting period which they are incurred.

Contribution: Contribution is the different between sales value an the variable cost of those sales expressed either in absolute terms or as a contribution per unit.  This is the central point in marginal costing.  When the contribution per unit is expressed as the different between the selling price and its marginal cost. Marginal costing cannot be used without calculating the contribution.

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