Marginal Costing as a Tool for Management Decision Making (a Case Study of Anammco Ltd Enugu)
The objective of The Study
General Objective of The Study
The general objective of the study is to assess the role of marginal costing in the process of decision-making in Anammco LTD Enugu.
In line with the general objective the following specific objectives are listed:
-To identify marginal costing techniques implemented in the company Anammco LTD Enugu
-To identify the role of existing marginal costing techniques in the process of managerial decision-making.
-To identify and assess the effectiveness of marginal costing in Anammco LTD to meet the objective of the company.
This chapter presents a review of literature on the concepts under study. The chapter begins with a theoretical review in section 2.2; 2.3decision making; 2.4 marginal costing for decision making2.5 reviews empirical studies where a number of studies done on marginal costing practices together with their findings. This is followed by a summary of the literature review section.
THEORETICAL LITERATURE REVIEW
DEFINITION AND CONCEPTS
Many groups and organizations have published and discussed about marginal costing and about its various types. And defined it in various ways. Each of these definitions has captured the basic concept of marginal costing using different words even though each of them varies slightly. The definitions are similar in recognizing marginal costing extensive scope, its relation to an organization goal, its relation to the managerial activities. Here below definition given by different authors and organizations.
Marginal costing aims to give management basis for decision making, improved efficiency and how to enhance the performance of the company. By using cost information, the company can allocate its resources to more profitable areas and see how and where costs originate, this is called cost allocation. Knowing how and where costs originate is only one part of the solution, another problem lies in how to allocate and track the costs to the appropriate process in the company (Vanderbeck, 2012).
Marginal costing is a specialized branch of accounting aimed at costs classification, accumulation, assignment and control. Marginal costing involves the establishment of budgets, standards costs and actual costs of operations, processes, activities or products, variance analysis and profitability (ICSI, 2013).
“Marginal costing is defined as the application of costing and marginal costing principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived therefore for the purposes of managerial decision making Wheldon (20n.d).
Another scholar Cherrington (1998) defined marginal costing as follows Marginal costing is the process of accumulating the costs of manufacturing, and other functional processes and identifying these costs with units produced or some other object. It is a unique sub filed of management and financial accounting. Marginal costing is applied primarily to manufacturing organization that combine and process raw material to finished products.
These definitions establish that:
- Marginal costing is concerned mainly with cost data
- Classification and allocation of costs
- engaged in planning and budgeting
- pricing finished goods
- enhance management performance
- support the overall activities of the organization
According to Thakur (2011), marginal costing is the process of accounting for cost, income and expenditure relating to the production of goods and services rendered and is part of a management innovations design to reinvent both the public sector and the private sector. Marginal costing is an effective management tool to transform any bureaucratic system in both the public and private sectors to a more responsive and innovative administration (Asinghe &Alawattage, 2012).
In addition to some given above, the role of marginal costing information for decision-making is emphasized in many definitions of accounting, as outlined below.
“Accounting can be seen as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”(Horngren,c.et al, 2002)
Also Horngren, Sundem and Stratton (Horngren,c.et al.,2002) see the main function of accounting information in its aid in the decision-making process, as the understanding of accounting information contributes to better decisions. So, by reporting and collecting accounting information, controllers can influence management‟s decision-making and lead them towards decisions that are in accordance with the organization‟s objectives (Jerreling, 2006).
All the above definitions of marginal costing have identified the main objectives of marginal costing is strengthening organization performance through effective decision making and systematic marginal costing formulation and implementation. in order to achieve the objectives and goals for which the organization was set up.
Marginal costing thus provides information to the management for decision of all sorts. It serves multiple purposes on account of which it is generally indistinguishable from management accounting or so-called internal accounting. Wilmot has summarized the nature of marginal costing as “the analyzing, recording, standardizing, forecasting, comparing, reporting and recommending” and the role of a cost account as that of “a historian, news agent and prophet”.
Intezari (2013) decision making ability is one of the critical abilities that managers are required to have and develop in order to lead their organizations in the business world.
In a decision making process there is rules which used as guide lines. Lepadatu (2006) in his work “the importance of the cost information in making decision” set the basic rules of making decisions:
- The estimated monetary value
- The best of the worst possibilities
- The best of the good possibilities
In any organization a decision made once may bring a fortune or cost a lot. That is why decision making becomes a careful task. Companies whose decision making process do not taken by expertise of the area fails before going so far. Such companies instead expertise of the area has developed a trend of making decisions based on feelings, rule of thumps and error and trial.
A basic requirement for the managerial accountancy is the existence of a solid information system of costs able to provide basic data. According to Lepadatu (2006) offered information must be useful for decision support, for the control and for the planning else it is valueless. The information system is cost efficient if and only if it provides: relevant, sufficiently detailed and precise information.
Offered information must be useful for decision support, for the control and for the planning. Else it is valueless. The information system is cost efficient if and only if it provides –relevant, sufficiently detailed and precise information.
The management accounting information system is responsible for providing information for the planning and budgeting process; for the implementation process; in the process of auditing, evaluating and, above all, for the decision-making process.
METHODOLOGY OF THE STUDY
This chapter is structured as follows research design, target population and data collection method.
Research design is the specification of techniques and process for obtaining the information required. This study adopted a descriptive survey design. According to Churchill (2011) it is appropriate where the study seeks to describe the characteristics of certain groups, estimate the proportion of people who have certain characteristics and make predictions. The major purpose of descriptive research is describing, recording, analyzing and reporting conditions that exists (Kothari, 2000). The study assets collect data from the company at one point in time and determine or evaluated the role of cost accounting practices on decision making process of the company.
According to Yin (2003) there are three types of case studies, depending up on the purpose. They are explanatory case studies, exploratory case studies and descriptive case studies. Exploratory case studies are often used to define the framework of a future study. Explanatory case studies, on the other hand, seek to define how and or why an experience took place. Descriptive case study used to present answers to a series of questions based on theoretical constructs. The aim of all types case study research is to develop an understanding of the system. The objective of this study is to assess the role of marginal costing in the process of decision making in Anammco LTD. Thus, descriptive case study was chosen for this study because it answers all the questions raised. In addition to this, the case study method is chosen because it allows the conduct of a detailed analysis using multiple sources of data (Yin, 2003). It is attempted to get data from multiple sources. Case study investigation becomes successful if data is collected from multiple sources (Gerring, 2007).
The descriptive research design encompasses interviews and questionnaires providing information which determined the nature of the situation at the time of research. Descriptive research involves gathering data that describe events and then organizes, tabulates, depicts and describe the data collection (Glass and Hopkins, 1984).
Descriptive research design involves both quantitative and qualitative data. Quantitative approach involves numerical data subjected quantitative analysis whereas qualitative approach involves data in contextual form that concerned with subjective valuation of attitudes, thoughts and behavior (Kothari, 2004). According to Schweitzer (2009) quantitative approach was used for its appropriateness to the determination of developing research questions and it is suitable for the type of numerical data required in the study. In this study qualitative data was used. In analyzing case study descriptive research, both qualitative and quantitative research approach is needed (Yin, 2003). In this study the researcher employed qualitative research approaches.
POPULATION, SAMPLE AND SAMPLING TECHNIQUE
Ngechu (2004), a population is a well-defined or set of people, services, elements, events, group of things or households that are being investigated.
A total of forty three Anammco LTD Enugu‟ employees were selected using purposive sampling technique. 43 respondents were participated from marginal costing, finance, production and development, human resource, sales and marketing and quality control departments. Among which 37 participants are responded properly.
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This chapter focuses on the data presentation, Analysis and Interpretation. The gathered data is presented using tables and graphs. The presented data is then analyzed and conclusions are made.
CONCLUSION AND RECOMMENDATIONS
This part of the study aims to summarize the findings that have emerged from the data analysis presented in chapter four.
Regarding to the use of marginal costing, the company increases market share and success in making profit and wealth maximization to meet its objectives. About planning and controlling system, most respondents agree that the company gathered information to enable budgeting, use activity analysis to run activities as planned, use resources effectively and create good employees’ motivation. On the other hand, the company’s management control strategic and operational matters effectively and entertaining fine strategic planning and execution that helps to control costs. But the management has a trend of taking corrective actions .
From how helpful the marginal costing tools and techniques at pricing and marketing activities, the company uses to provide quality products, to compute well in the market, to create fair price for customer satisfaction, to create more revenue by reducing costs, to enhance the competitiveness of the company for responding the competitors action and to meet the customers need. But the market research or competitors’ marginal costing information for selling price purpose is weak and incentives are given only for some departments particularly marketing and sales.
Regarding to facilitating decision making process, majority of the respondents agree that marginal costing tools facilitate decision making process by delegation of responsibility provide relevant data to the management timely, meet the goals of organization and enhance decision making quality.
According to Ali (2010), marginal costing is the process of recording, analyzing, classifying, summarizing and allocating cost associated with a process and then developing various course of action to control the costs. Its goal is to advice the management on how to optimize business practice and process based on cost efficiency and capability. It also provides the detailed cost information that management needs to control current operations and plan for the future. The broad objective of this research was to assess the role of marginal costing in the process of decision making in Anammco LTD Enugu. Investigating the company‟s planning and controlling system, marginal costing tools and techniques at pricing and market activities and facilitate decision making process at Anammco LTD Enugu were the specific objective derived from the broad objective. From this study, the following major findings have been drawing:
- The company increases its market share and success in making profit and wealth maximization to meet its objectives.
- In the company, gathered information enables for budgeting and pm and activity analysis help to run activities as planned.
- There is optimum utilization of resources in the company and its management controls strategic and operation effectively. In the company, there is good employees’ motivation, controlling costs and fine strategic planning and excision.
- The company uses marginal costing tools and techniques to provide quality products, to compute well in the market, to create fair price for customer satisfaction and to create more revenue by reducing costs.
- It also uses to enhance the competitiveness of the company for responding the competitor’s action and to meet the customers need. But the market research or competitors’ marginal costing information for selling price purpose is weak and incentives are given only for some departments particularly marketing and sales.
- Majority of the respondents agree that marginal costing tools facilitate decision making process by delegation of responsibility provide relevant data to the management timely, meet the goals of organization and enhance decision making quality.
The following recommendations are forwarded based on the conclusion of the study:
- This is a case study. The researcher does not have enough sample size to come up with an all inclusive principle or conclusion. Thus, the researcher doesn‟t have a guarantee that the recommendation applies to other companies.
- Incentives are proved to have improved the motivation of employees. Although some of the company‟s departments incentivize their respective employees, particularly the marketing and sales department, there are others who do not. The recommendation is that they start using this highly efficient tool and implement it for every employee and department.
- From the findings it is recognized that the company does not usually consume competitor‟s marginal costing information for pricing. Using such information is advisable for a better competitive advantage.
- Although there is optimum utilization of resources in the company and its management controls strategic and operation effectively, the management does not take corrective action properly. So the company should give correction whenever necessary.
- The company should use marginal costing information for selling price and gives incentives for all departments since the market research or competitors’ marginal costing information for selling price purpose is weak and incentives are given only for some departments particularly marketing and sales.
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