CHAPTER ONE

 INTRODUCTION

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 filter enterprises survive.  The motive for maximization of profit in business and quest for Wealth Creation being in vogue, management continues to remain under increasing obligation to improve its share of the market, its assets, its credit worthiness and its overall potential.

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.

This 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.  

This 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.

BRIEF HISTORY OF ANAMMCO LIMITED

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.

Although, the partnership agreement was signed in 1975, the company was incorporated in Nigeria on the 17th of January, 1977 under the name Anambra Motor Manufacturing Company Limited and a Cronym ANAMMCO. As a private limited liability company with an authorized share capital of N7,000,000 ordinary shares of N1.00 each all of which were issued and fully paid up.

SHARE HOLDING

The share holding structure is as follows:

%

Daimler –Benz Ag of Germany

40.00

Federal Government of Nigeria

35.00

Anambra State Government

12.50

Imo state Government

2.50

Rivers State Government

3.40

Nigeria Citizens and Associates

6.60

100.00

Despite the fact that the Company was incorporated in 1977, the laying of foundations stone was done on 12th of May, 1978 by then Military Governor of the old Anambra State, Col. John Atom Kpera.  The official commissioning of the plant was done on July 8th 1980, by the President of the Federal Republic of Nigeria, Alhaji Aliyu Usman Shehu Shagarri.

STATEMENT OF PROBLEM

This study will try to answer the questions listed below:

a.  Can marginal costing reduce the arbitrary allocation of production cost to cost centres?

b. With this technique of marginal costing can production not be increase without increasing the amount of fixed cost?

c. 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?

OBJECTIVES OF STUDY

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

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

-           Finding out any inherent deficiencies in its application.

-           To determine the condition for cost control and analysis and

-           Examine how management under this technique makes product decisions.

 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 attention to them would go a long way in improving the profit position of the firm.

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.

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.  This 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 (IMA’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.

HYPOTHESIS

 The following hypotheses are proposed for this study.

i.  Marginal costing principles aid prudent management decision-making.

ii.Statements prepared using marginal costing principles are easier to understand by management.

iii. Marginal costing aid in the achievement of the organizational goal.