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The topic of this research is effects of standard costing on the profitability
of a manufacturing company. The purpose of this study was to discover if
the application of standard costing techniques have any effect on
profitability, to explore the relationship between standard costing and the
profitability of manufacturing companies and also to determine whether
standard costing techniques and principles are being adopted and practiced
in Nigerian manufacturing companies (Nigerian breweries, Ama Eke, Udi
local government of Enugu state). The design of this study is descriptive
survey method and the study was conducted at Nigerian breweries, Ama
which is the case study of this research work. The instrument of data
collection was analyzed using the chi-square method. The researcher
discovered the following as her data findings that proper accounting
records are kept and are significantly necessary in the management of the
company. That the company employs standard costing in costing their
product and decisions are made with the standard costing information
obtained in the company. That accounting reports are prepared and
presented to the company’s management and that actions are taken
promptly on the information given in the report. That effective application
of standard costing has effect on the profitability of the company. That the
company benefit in a significant way through the use of standard costing
especially in the improvement of profit. The researcher came to a
conclusion that standard costing is widely used in Nigerian manufacturing
companies and that standard costing enhances adequate planning, control
and decision making processes in the company. That standard costing aids
manufacturing companies in the elimination of unprofitable products,
provision of costing information and cost control.
Approval page ii
Dedication- ii
Acknowledgement iii
Abstract iv
1.1 Background of the study 1
1.2 Statement of the problem 3
1.3 Objectives of the study 6
1.4 Research questions- 6
1.5 Hypothesis of the study 7
1.6 Significance of the study 8
1.7 Scope and limitation of the study 9
1.8 Definition of terms 10
References 14
Literature review
2.1 Concept of standard costing 15
2.2 Features of standard costing 21
2.3 Advantages and disadvantages of standard costing 36
2.4 Concept of profitability 39
2.5 Profit and profitability 42
2.6 Measurement of profit 46
2.7 Areas where standard costing improve profitability 47
2.8 Brief historical background of the case study 54
References 61
Research design and methodology
3.1 Research design 63
3.2 Sources of data 63
3.3 Research instrument 65
3.4 Reliability /validity of research instrument 65
3.5 Population 66
3.6 Sample size / techniques 67
3.7 Administration of research instrument 69
3.8 Method of data analysis 70
3.9 Decision criterion for validation of hypothesis 70
References 72
Data presentation and analysis
4.1 Data presentation 73
4.2 Testing of hypothesis 92
Summary of findings, conclusions and recommendation
5.1 Summary of findings 102
5.2 Conclusions 103
5.3 Recommendations 105
Bibliography 107
Appendix 109
The effect of standard of standard costing on profitability has been a
problem to manufacturing companies in Nigeria. The standard costing as a
tool for either improving or not improving profitability. Unlike its
contemporaries in the field of science, it deals with human beings and
calculation significant information.
Lucey (2002) defines standard costing as a technique which
establishes pre determined cost estimates of the cost of products and
services and then compares these pre determined costs with actual costs
as they incurred. Standard cost represent am estimated or pre determines
total cost of product per unit for an organization. Adeniji (2009) argues
that the process of estimating the total cost of production per unit is
described as standard costing technique.
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 fact, problems
associated with production and earning a profit was recognized for many
years before the concept of standard costing was invented. Standard
costing appeared in the early twentieth century when transaction volumes
were overwhelming the record keeping system in the use at that time.
Since then, prevalent use of computer systems and automated data entry
systems have reduced the need for standard costing, though not entirely
These standard costs reveals goals, spur actions and efforts for
effective management and equally provide checks such that exceptional
profit oriented goal performance can be achieved and the reserve adequate
punishment to be exercised for bad performance. Standard cost 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 system in
1920’s. it was brought into the 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 cost and their variances.
In Nigeria today, the economy is extremely bad. In this respect, a lot
of measures have been taken to measure the destining economic situation.
Among the measures taken to revamp the economy includes;
Structural adjustment program (SAP)
Second tier foreign exchange market
Ban on importation etc
These measures have adverse effect on the buying attitude of the
consumers. Cost of production has increased in manufacturing sector of
the economy which in effect has resulted to high prices of manufacturing
goods. In effect, no applicable level of demand could be recorded by most
manufacturers as the buyer’s purchasing power could no longer meet up
with the rising price level. Most of the manufactured products were
consumed by civil servants, public servants and other wage earners whose
take home pay pocket can no longer take them home. In this regards,
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 cost 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 areas like;
1. Irregular supply of water: The power holding company of Nigeria
(PHCN) does not render adequate services to manufacturers. PHCN will
take off power and the production would stop unscheduled thereby
resulting to much damages which the costs are added to cover all
2. Inadequate supply of water: water is always in short supply and in most
cases, water board does not supply water manufacturers need it. The
manufacturers resort to buy water needed for their production from the
open market to see the manufacturing activities are going on. In this
respect, the price of getting water is costlier than from water board in
most cases, whether water is supplied or not, water board will require
them to pay a reasonably monthly water rate.
3. Bad roads: in respect of transporting raw materials used from the
extraction area and evacuation of finished goods from the
manufacturing industry to the market where it is demanded, high
transport costs are made due to bad roads in Nigeria with special
reference to Eke, Udi LGA of Enugu state in particular.
4. Foreign competition: most of the indigenous manufacturers are not
given protection from foreign competitors and in most cases are
deprived of tax holidays.
There has been decreased profitability resulting from increased costs.
In effect, requires a 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 require special storage facilities where they are stored
before they are utilized to avoid spoilage. In most cases, the storage
facilities might be beyond the reach of some manufacturers. Along the line,
most manufacturers do not have adequate control over the resources as
they are easily impact on the government. Government policies may be
favorable or unfavorable to manufacturers in Nigeria; they can be
evidenced to restriction an total ban as most of them are being imported.
The use of unqualified and inexperienced accountants by some
industries pose a greater problems to such industries for the accountant
cannot adequately apply the accounting techniques required of them on
standard costing.
While carrying out this research, the following aspects were borne in mind;
1. To discover if the application of standard costing techniques have any
effect on the profitability of manufacturing companies.
2. To explore the relationship between standard costing and profitability in
manufacturing companies in Nigeria.
3. To determine whether standard costing techniques and principles are
being adopted and practiced in Nigerian manufacturing industries.
1. Does the application of standard costing techniques have any effect on
the profitability of manufacturing companies?
2. What are the relationship between standard costing and profitability in
manufacturing companies in Nigeria?
3. Are the principles of standard costing and standard costing techniques
being adopted and practiced in Nigeria?
To achieve the objectives of this study which is on the effect of standard
costing on the profitability of a manufacturing company, the researcher
formulated three hypotheses that will be tested in the process of this
study. They are as follows;
1. H0: The application of standard costing techniques has no effect on the
profitability of manufacturing companies in Nigeria.
H1: The application of standard costing has effect on the profitability
of manufacturing companies in Nigeria.
2. H0: There is no relationship between standard costing and profitability in
manufacturing companies in Nigeria.
H1: There is a relationship between standard costing and profitability in
manufacturing companies in Nigeria.
3. H0: The principle of standard costing and the standard costing technique
are not being adopted and practiced in Nigerian manufacturing
H1: The principle of standard costing and the standard costing technique
are being adopted and practiced in Nigerian manufacturing industries.
It is believed that standard costing aids management to plan for the
future, and if any justification is required for this research project on the
effect of standard costing on the profitability of manufacturing industries,
the view of Robert Appleby, one of the early British industrialist should be
released on. Appleby regards the key to managerial success as the setting
of standards for all business activities and measurement of performance
against the standards. He states that financial measurement should
penetrate into any cranny of the enterprise and in doctrine all management
in their working habit. In this regards, there is need to prove whether
standard costing is a more viable and preferable option to other costing
methods adopted for each products produced. There is a limit to the price
charged to production.
In effect, cost should be given maximum attention since revenue
less cost gives a balance of profit. Profit should be increased as it is every
industry is aiming at.
This research project is restricted to the manufacturing industries of
Nigerian breweries plc. The researcher focused on the Ama Brewery
located at Eke, udi local government area of Enugu state as this industry
operates under similar conditions as its counterparts within Nigeria an will
present similar problems.
As regarding the limitations on this research project, it would be
impossible to include all manufacturing industries of Nigeria brewery plc at
every location, therefore, this study was limited to Ama brewery, Eke,
Enugu state.
Time constraint was another strong factor that posed as a limitation
to this research because the study was carried out when the researcher
had so much work load. Thus, it was difficult for the researcher to meet up
some of the appointment with respondents.
Another limiting factor to this research project was the uncooperative
of some staff(s). Some of the staff(s) of the company taken into
consideration refused to be interviewed for the fear of official reprisal, if
they give out some committed information. This made it difficult for the
researcher to collect much primary information.
The concept of standard costing as predetermined or forecast
estimates of cost is wide and varied. The terms used in this research work
intend to have the same understanding with the definition of the standard
cost by the institute of cost and management accounting (ICMA) as “the
predetermined cost calculated in relation to the prescribed set of working
condition. Co-relating technical specification and scientific measurements of
materials, labor and wage rate expected to apply within the period which
the standard relates within an addition of appropriate share of budgeted
overhead. Its main purpose is to provide basis for control through variance
accounting for the valuation of stock and work in progress, and exceptional
cases for fixing selling prices. Some of the words used in this research
project are defined as follows;
 Standard costing: implies setting up standard costs for goods and
 Standards an budgets: both standards and budgets are concerned with
setting performance and cost levels for control purposes.
 Costing standards: meaningful standards which can be used for control
purposes rest on a foundation of properly and standardized methods
and procedures and comprehensive information system.
 Material standards: this implies setting the material content of a
 Labor standard: implies predetermining the exact grades of labor to be
used as well the times involved. Planned labor time can be expressed in
standard hours.
 Overhead standard: predetermined overhead absorption rates are the
standards of overhead for each cost center using budgeted standard
hours determined.
 Standard hour: this is defined as the quantity of work achievable at
standard performance, expressed in terms of standard unit of work in a
standard period of time.
 Variance accounting: this 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 cost, standard selling
price, standard profit margin and difference 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.
 Variance analysis: it is concerned with the section of variance
accounting that relates to the analysis into constituent section and
variances between planned and actual performance.
 Cost variance: this refers to the difference between the standard
(planned) cost and the comparable actual and historical cost incurred
during the specified time period.
 Controllable variance: it is a cost variance which can be identified as the
primary responsibility of a specified person.
 Sales variance: this is the difference between the budgeted value of
sales and the actual value of sales in a given period of time.
 Profit and loss variance: this is the difference between the planned
profit and actual profit and loss.
 Profitability: this means the ability to make profit from all business
activities of an organization, firm, company or an enterprise.
 Profit: this refers to the total income earned by the enterprise during the
specified period of time


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