Project Topic – Standard Costing and Variance Analysis as an Aid to Management Decision Making. (A Case Study of Dangote Group Companies.)
TABLE OF CONTENTS
Table of content
1.1 BACKGROUND OF STUDY
1.2 STATEMENT OF THE PROBLEM
1.3 AIMS & OBJECTIVES OF THE STUDY
1.4 SIGNIFINACE OF THE STUDY
1.5 SCOPE & LIMITATIONS OF THE STUDY
1.6 RESEARCH QUESTIONS
1.7 RESEARCH HYPOTHESIS
1.8 HISTORICAL BACKGROUND OF THE STUDY
1.9 DEFINITIONS OF TERMS
2.1 LITERATURE REVIEW
2.2 CLASSIFICATION OF STANDARD COSTING
2.3 STANDARD COST SHEET
2.4 STANDARD COSTING AND BUDGET
2.5 TYPES OF VARIANCE
2.6 COMPUTATION OF VARIANCE
2.7 STANDARD COSTING AND OTHER COSTING METHOD
3.1 POPULATION STUDY
3.2 SAMPLING PROCEDURE
3.3 SOURCES OF DATA COLLECTION
3.4 METHOD OF DATA ANALYSIS
4.1 DATA PRESENTATION
4.2 INTERPRETATION OF FINDINGS
- BACKGROUND OF THE STUDY
The purpose of most business organizations is to minimize cost and maximize revenue. This means they can ensure the growth and continuity of any business enterprises. To achieve these aims therefore, there is need for proper and adequate planning and control in a business setup.
There are various costing systems used by management of any business organizations to aid planning and control and one of the important systems is standard costing.
Standard costing is a control device that tries to establish in advance the expected cost and revenue of a future production. It indicates the amount expected to provide and sell a product. Standard costing helps in the achievement of the operational efficiency of a business. It presents planning of what is expected to be produced.
Analysis of variance is the most important job in the proper implement of a standard cost systems. Cost variances are just meaningless figures unless adequately analyzed and intelligent interpreted. Only through the medium of this analytical device can the figures tell the story of what is happening and point the way to improvement procedures. Here the standard cost system leaves the realm of technical accounting and dull debits and credits and enter the atmosphere of interpretive and creative analysis for management guidance.
Therefore, standard costing involves the presentation of standard cost. It should be highlighted from the given definition that standard costing system is principally, concerned with the setting standard performance, measuring the actual result and comparing with these performance.
The application of standard costing helps to judge the level of costing are:
- Standard direct material
- Standard manufacturing labour cost
- Standard direct labour cost
- Standard administration and setting overview cost.
Normally, when statement is set there is usually derivation form set standard, it is the difference between a standard cost and actual cost that is known as variance, it is the variance that provides information to management as regard control. A debt balance in variance account means that actual cost where higher than standard cost such a variance is called an adverse or unfavorable variance. A credit balance in a variance account also means actual cost is lower than standard cost.
Variance analysis beyond derivation and determination it also includes investigation of variance when the size of the variance is significant, it cause should be investigated and the corrective action should be reviewed.
In conclusion, variance and standard costing techniques assist management in planning and control if place more emphasis on the principle of management where standard are set and variance occur from the standard cost.
Among the costing techniques (standard costing marginal costing and absorption costing) those costing approaches or systems of presenting information to management for pliancy decision making among widely recognized techniques. This techniques enables management to plan and impose control operations.
- STATEMENT OF THE PROBLEM
The word variance will represent the difference between the standard cost of production and the actual cost of production or the difference between the budgeted revenue and the actual revenue. The process of classifying a given variance into its sub-variance is describe as variance analysis. A given variance may be interpreted to represent adverse or favorable to the adverse of the standard cost of production is lower than the actual revenue. On the other hand, a variance will be interpreted to mean favorable to the organization if the standard cost of production is higher than the actual cost of production or the budgeted profit is lower than the actual profit. The focus of this study is to offer an empirical evidence on how variance analysis helps to control cost.
- AIMS AND OBJECTIVE OF THE STUDY
The two main objectives of the study are:
- To identify the extent to which variance analysis provide direction to the causes of non-performance as against standard performance.
- To find out whether variance analysis enhances management improvement in operations.
1.4 SIGNIFICANCE OF THE STUDY
It is the principle responsibility of management ensure that work of various responsibility center in which one of them are administering are done by person who report to them.
Standard costing in management decision making is a useful tools in various respect. However standard costing may be useful for
- A basis for controlling performance
- Providing a more retinal management of inventory amount and cost record keeping
- Providing a more information that is used for certain types of decision.
- Reducing the cost of record keeping.
1.5 SCOPE AND LIMITATIONS OF THE STUDY
The research is restricted to use of standard costing and variance analysis in business organization and how it can management in decision making standard cost system is one of the measure that it can be applied to sustain or virile growth in both medium and large scale industries. It would gear them to achieve their target.
The benefit is derivable in using standard costing and variance analysis in numerous, they are however having the following short coming.
Standard costing systems does have brief lifespan and are therefore prone to change standard determination and hence it is uniformity to across company.
Fluctuation in the price of product is another limitation to the use of standard costing system generally, price of a product are stable due to inflation in price of goods and services, this make the standard set to be unrealistic.
- RESEARCH QUESTIONS
The following two questions were used to guide the study.
- To what extent does variance analysis provides directions to the causes of non-performance as against standard performance.
- Does variance analysis enhances management improvement in operations?
1.7 RESEARCH HYPOTHESIS
A hypothesis can be seen as a claim made about a population subject to test, to determine its validity. It is often stated inform of a relationship between a dependent variables and independent variables.
For the purpose of this study the following hypothesis are considered relevant.
Ho: Variance analysis significantly help in providing directions to the causes of non-performance as against standard performance?
Hi: Variance analysis is not important in providing direction to the causes of non-performance as against standard performance.
Ho: Variance analysis enhances management improvement in operation.
Hi: Variance analysis does not enhances management improvement in operation.
1.8 HISTORICAL BACKGROUND OF DANGOTE GROUP OF COMPANY
Dangote groups were found in 1981, by Aliko Dangote he was the chairman and chief executive officer (CEO) of the group. It headquarter is base in Lagos and branch across Nigeria and African. The product of Dangote group of companies includes the following.
- Sugar production
- Cement production
- Textile production
- Crude oil processing
- Natural gases
- Flour mill production
Dangote group was incorporate during 1980 and 1990 the group ill-nature in to the importation of sugar, milk, flour, rice, cement and iron rods then later the group embarked on the haulage business, which stated with 6000 truck under Dangote transport.
Dangote industries limited was incorporated in order to sustain the groups market leadership in trading commodities and expand in to manufacturing food, clothing and building material.
The group focuses on provision of local value added product and services that meet the need of the African population. Dangote group is currently the largest industrial conglomerate in West Africa and one at the largest in African. It generates revenue in excess of 1.25 billion and in 2010. It employee is in excess of 11,000.
1.9 DEFINITION OF TERMS
- Marginal costing: this is the principle whereby variable cost are changed to cost unit and fixed cost attributable to the relevant cost in written off in full against the contribution for the period.
- Standard cost (CS): This is a predetermined calculation of how such should be under specific working conditions.
- Fixed costs (FC): These are the cost which tends to be unaffected by increase or decrease in the level of output.
- Variable costs (VC): Variable costs are the cost that very directly proportion to change in productive output.
- Labour efficiency variable (LEV): This is the difference between the standard hour for actual production attained and the hour actual worked, value of the standard labour etc.
- Material price variance (MPV): This is the difference between standard price and actual purchase price for the quantity of materials purchased.
- Labour cost variance (LCV): This is the difference between amount paid as wages and amount that ought to have been paid for the production level.
- Standard hour (SH): Is a hypothetical unit pre-established ton present the amount of work which should be performed in one hour at standard performance.
- Material cost variance (MCV): This is the difference between actual cost (AC) of material bought or used for producing certain actual output.
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