THE ROLE OF COST ACCOUNTING TECHNIQUES IN ACHIEVING EFFECTIVE COST CONTROL IN THE MANUFACTURING INDUSTRY
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THE ROLE OF
COST ACCOUNTING TECHNIQUES IN ACHIEVING EFFECTIVE COST CONTROL IN THE
MANUFACTURING INDUSTRY
ABSTRACT
This
research report was carried out to ascertain whether traditional costing
techniques (standard, marginal and absorption costing) are still relevant for
today’s demand and greater cost accuracy. Managers and Accounting are confused
about which of these techniques will enhance effective cost control and
effective management decision. Several literatures were reviewed and the
problems were investigated through the use of quantitative research design
where questionnaires were distributed to the production department of Coca-Cola
Nigeria PLC which is the case study. The questionnaire was analyzed using the
ordinary least square regression method and correlation co-efficient from which
the hypothesis were tested and conclusions reached. The analysis reveals that
traditional costing techniques are still relevant for today’s demand and
greater cost accuracy and that Marginal costing is the most effective for cost
control and effective management decision. In conclusion, the result is useful
because Academic and Practitioner can reach a consensus that these costing
techniques are not outdated but very relevant and Managers can explore a
greater use of Marginal Costing as the most effective tool for cost control
effective management decision.
CHAPTER ONE
1.0
BACKGROUND OF THE STUDY
Costing
techniques is the process of ascertaining cost. These techniques consist of
principles and rules which govern the procedure of ascertaining cost of
products or services. The techniques to be followed for analysis of expenses
and the processes of different products vary from industry to industry. The
main object of costing is the analysis of financial records so as to subdivide
expenditure and to allocate it carefully to selected cost centers and hence
build up a total cost for the products. (The Institute of Company Secretaries
of India, (2013). In the ancient days, the information required by those who
were interested in a business organization was met by practicing a system of
accounting known as financial accounting system. Financial accounting is mainly
concerned with preparation of two important statements, viz., income statement
(or profit & loss account) and positional statement (or Balance Sheet).
This information served the needs of all those who are not directly associated
with management of business. Thus financial accounts are concerned with
external reporting as it provides information to external authorities. But the
management of every business organization is interested to know much more than
the usual information supplied to outsiders. In order to carry out its
functions of planning, decision-making and control, it requires additional cost
data. The financial accounts to some extent fail to provide required cost data
to management and hence a new system of accounting which could provide internal
report to management was conceived of and this is the genesis of Cost
Accounting and its techniques such as Marginal costing, Standard costing,
Absorption costing e.t.c. The history of cost accounting techniques can be
traced back to the fourteenth century. In the course of its evolution, it
passed through following stages.
(1) In the first stage of its development, cost
accounting was concerned only with the three prime cost elements, viz., direct
material cost, direct labor cost and direct expenses. For recording the
transactions relating to materials the important documents used were (a) stores
ledger, (b) a material requisition note, and (c) materials received note. To
account for labor cost, employee time card and labor cost card were devised by
Mr. Metcalfe. Later on a distinction between manufacturing and
non-manufacturing cost was made by Mr. Norton. Thus material cost, labor cost
and manufacturing cost constituted prime cost. (2) Secondly, around the turn of
the nineteenth century, the importance of nonmanufacturing cost (overheads) was
recognized as one of the distinct element of cost. The method of charging
non-manufacturing cost to the production cost was devised under this stage.
(3) Thirdly, the techniques of estimation and
standards are devised. Instead of using actual cost, standard costs are used
and by comparing with the actual cost the differences are noted, analyzed and
disposed off accordingly. This helps in knowing the efficiency of the business
undertaking.
(4) Fourthly, cost accounting techniques were
applied to all types of business undertakings. The costing principles and
techniques were also extended to important functions of a business.
(5) In modem times the development of
electronic data processing has occupied significant stage in the growth of cost
accounting system. Having ascertained ‘cost’ and ‘profit’, cost accountancy is
concerned with presentation of information to management to enable management
to carry out its functions, reports must be promptly made available at the
right time.
(Sangladji ,
2008). From the mid 1980s, the start of new movements in the field of
managerial/cost accounting, a gap has emerged between the opinions of academia
and practitioners regarding the degree of usefulness of managerial/cost
accounting techniques. It is believed that practitioners generally prefer
managerial/cost accounting techniques which are simple, practical and
economically applicable. On the other hand, many authors and academia believe
that the traditional managerial/cost accounting techniques are obsolete and not
effective for managerial decision-making purposes and cost control. As stated
by one author, most of the traditional management/cost accounting information
are usually too late, too aggregated, and too distorted to be relevant for
decision-making purposes. Despite the considerable criticisms to the
traditional costing techniques and increasing interest in developing new
managerial/cost accounting models in recent years, the traditional cost accounting
techniques are still widely used by many organization (Sangladji,2008).
According to
previous researchers, as stated by Nguyen (2011), different costing techniques
have different core competitive advantages to organizations. From the oldest to
newest method, decision of managers is still affected, As a result, finding the
best method to reduce the failure rates and increase the effectiveness of cost
allocation and control is a hard question for both managers and accountants.
Based on the accounting history, there are many types of costing method such
as: traditional or absorption costing method, variable costing method,
standard costing, throughput costing
method, and ABC costing method. Changes in business environment requires a
better method which can help managers control their performance. For many
researchers, cost accounting techniques are still a major concern for
them. Different techniques lead to
different decisions of the managers therefore profits to the organizations can
not be the same. A dynamic business environment lead to the need for new
costing methods for new cost objects. Marginal costing was born as a result of
the demand for this. According to this method, only costs which are adjusted to
the production process should he concerned by managers. However, in the long
run, some fixed costs still need to change. As a must a new cost accounting
method is invented. Instead at sharing
equally among various departments and maintaining the fixed costs in the long
run, expenses arc divided differently based on some factors such as labor
hours, direct materials and the fixed cost can be changed based on the need of the production process. None
of the products need the same quantity of direct material as well as the direct
labor hours. So managers should know how to use and allocate costs more
efficiently. However, for the purpose of this research, the costing techniques
the researcher shall be examining will be limited to Marginal costing,
Absorption costing and Standard Costing being the commonest traditional costing
techniques as time and space will not allow him examine other costing
techniques such as historical costing and uniform costing e.t.c. The institute
of Cost and Management Accountant defines Standard Costing as a “predetermined cost
which is calculated from management standard of efficient operations and
relevant necessary expenditure”. The usefulness of information provided from
the analysis of variance related to standard costing has been challenged.
Attention to quality some critics say is inadequate. Others have proposed that
quality considerations can be incorporated into standard costing (See Cheatham
and Cheatham, 1996).
On the other
hand, Absorption costing is a method for appraising or valuing a firm’s total
cost including all manufacturing costs as product costs, regardless of whether
they are variable or fixed and therefore it is frequently referred to as the
full cost method. (Seiler, 1959; Chandra and Paperman, 1976; Lal and
Srivastava, 2008) though confronted with the problem of arbitrary apportionment
of fixed cost. While under variable costing, only those manufacturing costs
that vary with output are treated as product costs. This would usually include
direct material, direct labor, and the variable portion of manufacturing
overhead. Variable costing is sometimes referred to as direct costing or
marginal costing. Fixed manufacturing overhead is treated as period cost just
as selling and administrative expenses. Thus in inventory valuation or in cost
of goods sold fixed manufacturing overhead is not treated as product cost in
marginal costing technique. (Seiler, 1959; Chandra and Paperman, 1976; Lal and
Srivastava, 2008; Swamidas, 2000)
1.1
STATEMENT OF THE PROBLEM
From the
background of our study above and brief review of relevant literature the
following problems were identified:
There is
widespread complain that traditional cost accounting techniques such as standard costing ,marginal costing
and absorption costing have been
found obsolete and deficient for today demand and greater cost accuracy
Managers and
Accountants are confused about which of the costing techniques to use which will ensure
effective cost control and will enhance
effective management decision
Inadequate
knowledge as to whether or not quality considerations can be incorporated into each of those costing
techniques
The
assignment of indirect costs to products, departments, and other cost object has been a long standing problem
in cost accounting
1.2 RESEARCH OBJECTIVES
The main
objectives of this research is to determine the following
The degree
of usefulness of different managerial/cost accounting techniques (marginal
costing, standard costing and absorption costing).
To find a
long lasting solution to the problem of apportionment of indirect cost
To carry out
an empirical study to ascertain whether our traditional costing techniques are still relevant for today’s
demand and greater cost accuracy.
To know if
quality consideration can be incorporated into each of the costing techniques.
To know
which of the costing technique is most effective for cost control and will enhance management decision.
1.3 RESEARCH QUESTIONS
Some burning
issues on the researchers mind will be looked at critically with the hope of
proffering solutions to them and are as follows:
What is the
most appropriate basis for the apportionment of fixed cost
Are
traditional costing techniques still relevant for today’s demand and greater
cost accuracy.
Which of the
costing techniques is most effective for cost control and will enhance
management decision.
Can quality
consideration be incorporated into each of the costing techniques.
1.4 RESEARCH HYPOTHESIS
In other for our study to be properly guided,
the following null (Ho) and alternative hypothesis (Hi) have been formulated:
HYPOTHESIS
ONE:
Ho: Traditional costing techniques are not
relevant for today’s demand and
greater cost accuracy.
Hi: Traditional costing techniques are relevant
for today’s demand and greater cost
accuracy.
HYPOTHESIS
TWO
Ho: Quality consideration cannot be incorporated
into traditional costing
techniques
Hi: Quality consideration can he incorporated
into traditional costing techniques.
1.5 SCOPE AND LIMITATIONS OF THE STUDY
This section
explores the confines within which our research will be carried out and the
circumstances beyond the researcher’s circumstances which might affect our
study. This research will explore our traditional costing techniques such as
standard costing marginal costing and absorption costing to the fullest while
the researcher will use Coca-Cola Bottling company as the case study from which
the population for our research will be examined.
In addition,
constraint such as limited lime, inadequate finance and inability to recover
all questionnaires used in gathering data might he encountered and this might
have a negative impact on our study. However the researcher will put in his
best in ensuring a worth while research is conducted.
1.9 SIGNIFICANCE OF THE STUDY
The major
objective of management in any organization is to minimize cost and maximize
profit by avoiding wastage of resources. This research will however be of
interest to Nigeria’s manufacturing industry as it will:
Enlighten
on how best to minimize the cost of
production through effective cost control while maintain the quality of
her output
Show us how
to judiciously utilize our scarce resources in other to avoid wastage
It will help
the sector to be quality driven which
will increase customers patronage
Enhance the
productive capacity of the sector so that her contribution to the GDP ( Gross Domestic Product) will
be significant to accelerate
the pace of economic growth and development
1.10 HISTORICAL BACKGROUND OF CASE STUDY
The Coca-
Cola Bottling Company is an American multinational, retailer and marketer of
non alcoholic beverage concentrates and syrup which has its headquarters in
Atlanta Georgia. The company is best known for its flagship product Coca-Cola,
invented in 1886 by Pharmacist John Smith Pembemton in Columbus Georgia.
The
Coca-Cola formula and brand was Bought in 1889 by Asia Candler who incorporated
the company in 1882.Beside its namesakes Coco-Cola beverage, Coca-Cola
currently offers more than 500 brands in over 200 countries and serves over
1.7billion people each day
Tab was
Coca-Colas first attempt to develop diet soft drink using Saccharin as a sugar
substitute introduced in 1963l, the product is still sold today, although its
sales have swindled since the introduction of Diet Coke. The company also
produces a number of other soft drinks. During the 1990s, the company responded
to growing consumer’s interest in healthy beverages by introducing several new
carbonated beverage brands. These includes: Minute Maid, Juices to go. Powerade
Sports beverage flavored tea Nestea (in Joint venture with Nestea) etc.
1.11 DEFINITION OF TERMS
Marginal
Costing: The C. I.MA London defines marginal costing as “a techniques of costing which aims at
ascertaining marginal costs, determining the effects of changes in costs,
volume, and price c.tc. on the Company’s profitability, stability etc. and
furnishing the relevant data to the management for enabling it to take various
management decisions by segregating total costs into variable and fixed costs.”
Standard
Costing: Standard Costing is a technique of cost accounting which compares the standard cost of each product
or service with actual cost to determine the efficiency of the operation, so
that any remedial action may be
taken immediately.
Absorption
Costing: Absorption Costing is also termed as Full Costing (or) Orthodox Costing. It is the technique that takes into account
charging of all costs both variable
and fixed costs to operation
Direct Cost:
These are cost that are easily traced to a product or cost unit to a cost center or some specific activity e.g
cost of wood for making furniture. It is also called traceable cost
Indirect
Cost: These are difficult to trace to a single product. They are common to sever al products e.g. Salary of
a factory manager. It is also called
common cost.
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