TABLE OF CONTENTS
2.1 Introduction to the Study
2.2 Historical Background of Nestle Nigeria Plc
2.3 Purpose of Study
2.4 Significance of Study
2.5 Scope and Limitation
2.0 Literature Review
2.1 Meaning of Marginal Costing
2.2 Theoretical Framework
2.3 The Importance of Marginal Costing To
2.4 Marginal Costing and Pricing
2.5 Advantages and Disadvantages of Marginal
2.6 Pricing Strategy
2.7 Marginal Costing Vs Absorption Costing
Principles and Applications of
Marginal Costing Price Fixation
Accounting Function, Cost Control and
The Nigeria Present Economic Situation
3.0 Research Methodology
3.1 Research Design
3.2 Research Instrument
3.3 The Use of Questionnaire Method
3.4 Personal Interview
3.5 Population Characteristics
3.6 Sample Size
4.0 Analysis of Data and Presentation
4.2 Analysis of Data and Classification
4.3 Analysis of Data According To Test of
5.0 Summary, Conclusion and Recommendation
TO THE STUDY
This project is designed to evaluate the application
of marginal costing technique in a manufacturing company with special reference
to Nestle Nigeria Plc as a case study.
It therefore examines the techniques of marginal
costing as a tool of industrial survival in the Nigeria present economy. The
project will also examine cost control system of Nestle Nigeria Plc so as to
know whether or not a control system exists.
The effective control of production and distribution
of operational cost arises from the efficient application of operational
control, adequate cost accounting systems, analysis of cost data and variances,
formulation of product policies and using of already established budgets.
Marginal costing techniques (MCT) will be ascertained
in Nestle Nigeria Plc as related to:
Various methods of valuing material
Determination of marginal costing per
unit of a product.
Store routine, store control and issue
Ascertain actual cost per unit.
Marginal costing and its application
This is a well-known concept of economic theory. It
may be described as the change in total cost which arises as a result of an
increase and or decrease by one unit in volume of output. Marginal cost is an
amount at any given volume of output by which aggregate costs are changed if
the volume of output is increased or decreased by one unit.
Marginal cost is synonymous with variable costs,
prime costs plus variable overheads in the short run but, in a way, would also
include fixed cost in the planning production activities over a long period of
time involving an increase in the productive capacity of business.
Theoretically marginal cost and differential cost are the same. If there is no
change in fixed cost then both of these costs will be same. Thus marginal cost
does not include fixed cost at all whereas differential cost may include an
element of fixed cost as well if fixed cost changes due to a decision.
Marginal costing is a very important technique of
decision making. It is a comparatively new area in the field of accounting but
it is gradually gaining more and more acceptance. It is the method of matching
cost with revenue to determine periodic income. It is the ascertainment of
marginal cost and of the effect on profit of changes in volume or type of
output by differentiating fixed costs and variable cost. In this context it
should be noted that it is not a system of costing like process or job costing
but it is simply an approach to the presentation of accounting information
meaningful to management. In this all cost are segregated into fixed and
variable components. Only the variable costs are regarded as product cost and
are used to value inventory and cost of goods sold. The fixed costs are treated
as period cost and are charged directly to profit and loss account. Thus no
part of fixed manufacturing cost is deferred to the next period as inventory.
While preparing a profit and loss account on marginal costing basis, the
variable or marginal cost of sales is deducted from sales value and the
difference is termed as contribution margin.
The technique of marginal costing is a valuable aid
to management in taking various policy decisions. The following is one of the
problems where managerial costing analysis is useful:
Pricing of products: product pricing is usually considered
to be a difficult problem, particularly in non-repetitive production. The
problem is to equate the demand and supply in such cases marginal costing is
very helpful. This technique can help management in fixing prices in such
(a) A trade depression in industry
(c) A seasonal fluctuations.
BACKGROUND OF NESTLE NIGERIA PLC
Nestle Nigeria Plc is a member of the respected and
trustworthy nutrition; health and wellness company renowned world-wide for its
top and high quality products. The company commenced simple trading operations
in Nigeria in 1961 and has today grown into a leading food manufacturing and
marketing company. Nestle was listed on the Nigerian Stock exchange on April
20, 1979. Nestle S.A of Switzerland and Nestle CWA Ltd, Ghana are the major
shareholders of the company, controlling 31.17% and 59.13% of the company
RAW MATERIAL SOURCING
Nestle Nigeria procures some of its raw materials
such as corn grains, Soya beans, cocoa powder and sorghum locally from farmers
through contractual and partnering arrangement that enables them benefits from
the technical advice and assistance of the company continuous supply of raw
materials that meet its high quality standards. Nestle also imports some of its
raw materials which include Monosodium Glutamate, Milk Skimmed Powder, Full
Cream Milk powder & Salt through Suppliers. The company's objective is to
satisfy the requirements of consumers with high quality food products by
ensuring safety and quality of its product from raw materials till the finished
products get to the final consumer. The suppliers are also aware of this objective
and they ensure compliance with all Nestle Food Safety Standards.
CORPORATE HEAD OFFICE
The Corporate Head Office is situated at Ilupeju
Industrial Avenue, Lagos. This is the administrative office where customer
servicing, demand and supply planning and vendors payment takes place. Other
departments in Head Office include Human Resources, Finance and Control, Import
and Export, Purchasing and Sales.
The manufacturing complex is located at Agbara
Industrial Estate, in Ogun State. The main production units were designed in
line with modem manufacturing methods which ensure efficient production of the
following products: Nutrend, Cerelac maize, Cerelac Wheat, Milo, Maggi
varieties, Chocomilo and Golden Mom. Nestle Nigeria also imports some of its
finished products which include Nescafe, NAN, Nido Milk etc.
Nestle Nigeria recently commissioned a new
manufacturing complex known as Flower gate factory which is located in Shagamu,
Ogun State. This new manufacturing complex will further strengthen Nestle
Nigeria's role as the largest culinary manufacturing operation on the African
continent. Spread over an area of 36.3 hectares, the new 12-hectare facility
specializes in the production of Maggi products and more specifically in
Popularly Positioned Products (PPP) varieties of this popular brand. Nestle's
PPPs are products adapted to meet the specific requirements of emerging
consumers in terms of price, accessibility, format, and nutritional benefits
and they are a key driver for the future growth of Nestle's operations in
Nigeria. Many of the Maggi products in Africa are iodine fortified to help
combat iodine deficiencies among the local population.
The Distribution Centre is located at Otta, in Ogun
state. The distribution system ensures the widest possible penetration into the
nation's markets at a Pan-Nigeria Price, which is the same for every buyer
anywhere in Nigeria. At the heart of the system is the Distribution Centre,
which occupies an eight-hectare in Otta Industrial Estate.
HUMAN RESOURCES AND TRAINING POLICY
Nestle Nigeria currently has a total number of 2,216
employees. Continuous attention is given to training and development of staff
at all levels to improve their technical competence and prepare them for future
challenges and career opportunities. In addition to internal courses and
seminars with the company, it also uses its training facilities all over the
world in collaboration with its technical advisers, Netsuke Limited of
Switzerland. Some managers are currently on expatriation in other Nestle
markets which include Switzerland, Ghana, Cote d'Ivoire, United States of
America, United Arab Emirates and Australia under the Company's International
Management Exchange Programme. In line with its policy, Nestle Nigeria also
awards Secondary and tertiary education scholarships to deserving Children of
its staff. The scope and value of the awards are constantly reviewed and
The purpose of this study (research work) is to
evaluate and examine the various applications of Marginal Costing Techniques as
a survival tool in the Nigeria present economic situation. Some of the
objectives are summarized as follows:
To understand the meaning and principle
on which marginal costing operates and the purpose for which it is used.
ii. To find a way of controlling
cost in order to break even as well as to help the cost accounting system of
the industry to calculate cost and value of stock accurately.
iii. To provide an appropriate basis for closing
stock valuation and work in progress.
iv. To look into the existence and
application of the basic principles of marginal costing techniques in Nestle
To ascertain the relationship between
costs incurred in the production process to the level of activities and the
revenue generated for effective management decision.
1.3 SIGNIFICANCE OF THE STUDY
This refers to the importance and benefits of the
project work to the manufacturing organization and to the Nigeria economy as a
These are hereby highlighted below:
The study will be of immense benefit to
students and Accountants in the Manufacturing outfit.
The study will create a massive
awareness on the risks involved by using this technique during short run or
The study will establish and ensure that
information provided for decisions making are very much reliable.
The study will encompass the ways of
distinguishing between fixed cost and variable costs.
1.4 SCOPE AND
It is part of the management responsibilities to set
up and implement controls in an organization. This project will look into the
various marginal costing techniques and cost control in Nestle Nigeria Plc with
The need for costing and marginal
The role of Nestle Nigeria Plc as per
the use of marginal costing technique in the company.
The project will also look at information necessary
for short term decision making and how marginal costing can provide suitable
information. Limitation, however, to this study will include lack of time due
to other academic works, financial constraint which will make the scope of the
study to be limited to data provided by the management of the company
Variable cost of production does not change with the level of activities.
Hi: Variable cost of production
changes with the level of activities.
Inflation does not affect the demand for units of goods.
Hi: Inflation affects the demand
for units of goods.
A sound marginal costing techniques do not influence the survival of a
Hi: A sound marginal costing
techniques influence the survival of a manufacturing company.
The level of production is not influenced by the demand for product.
Hi: The level of production is not
influenced by the demand for product.