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                                      TITLE PAGE

                      MARGINAL COSTING TECHNIQUE AS A TOOL FOR MANAGEMENT DECISION MAKING

ABSTRACT

This research was aimed at finding out what marginal costing is all about, to evaluate and critically examine the various application of marginal costing technique for decision and to investigate the problems arising from making use of the technique and then to provide possible solution to the problems based on the research findings, and also to make recommendations when if implemented, would help organization adopt the technique.

The data for the study were got from your principals sources questionnaire, library research, oral interview and personal observations.

The data were analysed with percentages while the tests and analysis of the research hypothesis were done using chi-square statistical technique.

This research has revealed that the importance of marginal costing technique ties in the good assistance it may give a solving problems. Marginal costing technique is concerned particularly with the ascertainment of marginal effect on profit of changes in volume or type of output by differentiating between fixed cost and variable cost. It helps to facilitate cost control and it brings out clear and simple terms which shows exact relationship between cost, selling price and volume. It is the researchers belief that those recommendation would help achieve the desired objectives. If properly adhered to by the organizations adopting the technique.

TABLE OF CONTENT

CHAPTER ONE

1.0.    Introduction                                                         1

1. Statement of problem                                           6
2. Purpose of the study                                            7
3. Significance of the study                                      7
4. Statement of hypothesis                                       8
5. Scope of the study                                               9
6. Limitation of the study                                         10
7. Definition of terms                                               10

CHAPTER TWO

1. Review of related literature                                  15

2.1     Brief review                                                          15

1. Relevant and irrelevant cost for decision making18
2. Comparison between marginal costing Technique and Absorption technique                                                     38
3. Difference in stock variable in absorption and marginal costing approach.                                                         55
4. Advantages of marginal costing technique 61
5. Disadvantages of marginal costing technique       63
6. Importance of marginal costing technique  64

CHAPTER THREE

1. Research design and methodology              66

3.1     Sources of data                                                    67

• Primary data                                                        68
• Secondary data                                           68
  1. Sample used                                                         69
  2. Method of investigation                                       70

CHAPTER FOUR

1. Data presentation and analysis                            76

4.1     Data presentation and analysis                            76

1. Test of hypothesis                                                88

CHAPTER FIVE

1. Summary of findings, conclusion and recommendation

5.1     Findings                                                               99

1. Conclusion                                                           101
2. Recommendations.                                               104

BIBLIOGRAPHY                                                                   106

APPENDIX                                                                             108

QUESTIONNAIRE

CHAPTER ONE

1.0     INTRODUCTION

Marginal costing not quote source costing method but a costing techniques used in the routine cost accounting system for the calculation of costs and the valuation of stocks. It is used as basis for providing information to management for planning and decision – making.

R.WARWICK DOIZSON, 1971 defines the term ‘costing’ as the technique of ascertaining costs. Costing is firstly, the technique of ascertaining costs. This technique consists of a number of principles and rules which government procedure of ascertaining costs of different kinds. As the technique is developed and improved so are the principles and rules are modified in accordance with these developments. The techniques of costing, therefore, is never static nor are its rules fixed for all time.

Costing is secondly, a process. This process is the day to routine of ascertaining costs, whatever the costs ascertained may be and by whatever means these costs are determined. Marginal costing distinguishes between fixed costs and variable costs.

T. LUCEY, (1993), defined marginal costing as the accounting system in which variable costs are charged to costs are charged to costs units and the fixed costs of the period are written – off in full which is incurred for a period, and which within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover).

Marginal costing can also be defined as the increase in total costs resulting from one more unit or batch of units being produced. Assume, a hotel accommodation 400 guests during a particular week and incurred a total costs of N20,000 the average costs per guest would be N50. Hence, if in the following week the hotel accommodated 401 guest and has a total costs of N20,010 the marginal costs therefore, reflects the changes accruing in the variable portion of total cost.

Cost unit as mentioned earlier in the definition given by T. LUCEY can be defined as a quantitative unit of production service in relation to which costs are ascertained. The cost unit table used in any given situation is that which is most relevant to the purpose of the cost ascertainment exercise. This means that in any organization, numerous cost units may be used for particular parts of the organization or for different purposes.

There are alternative concepts of marginal cost. To the accountant, cost is average variable cost, which is presumed to act in a linear fashion i.e. marginal cost per unit is assumed to be constant in the short run, over the activity range being considered. Whereas, to the economist, marginal cost is the additional cost incurred by the production for one extra unit.

 

These views can be contrasted in the following graph of the accountant and the economist:

  Accountant’s view                                    Economist’s view

The differences of view point regarding marginal cost per unit results in the above alternative views of a firms total cost structure.

The economic model is an explanation of the cost behaviour of firms in general where as the accounting model is an attempt to provide a pragmatic basis for decision making in a particular firm. However, it is likely that differences between the two view points are more apparent than real.

 

It would be important to state here that marginal costing technique in use prior to marginal costing technique was the absorption costing technique/conventional approach or historical method.

The chartered institute of management accountant (CIMA) defines absorption costing as the practice of charging all costs, both variable and fixed to operations, processes or products.

The basis differences between marginal costing distinguishes between fixed and variable costs whereas absorption costing d