Abstract

This study was to examine the effect of standard costing on the profitability of manufacturing companies in Buea. The purpose of this study was to find out if the application of standard costing has any effect on profitability of manufacturing companies. The specific research objectives were: To determine the effect of cost estimation on the profitability of manufacturing companies and To examine the effect of cost planning on the profitability of manufacturing companies.

The study adopted a descriptive survey design. The study targeted 40 respondents which were made up of managers, owners, supervisors and operating employees of manufacturing companies in Buea. The study made use of primary data that was collected using questionnaire.

The collected data was analyzed using mean, standard deviation, frequencies and percentages. Regression analysis was used to test for the relationship between the independent variable (standard costing) and the dependent variable (profitability) of manufacturing companies.

The study concluded that the application of standard costing has a significant positive effects on the profitability of manufacturing companies and that the principle of standard costing and standard costing techniques are supposed to be applied not only in Buea but also in the world at large since standard costing enhances adequate planning, control, and decision making.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Manufacturing companies play a very vital role in the world because they deal with the production of commodities consumed in the world and in municipality of Buea to be specific. The problems associated with production and earning a profit in manufacturing companies was recognized many years before the concept of standard costing was invented.

Standard costing appeared in the early twentieth century when transaction volumes were exceeding the record keeping system in the use at that time. Since then, commerce the use of computer systems and automated data entry systems which has reduced the need for standard costing, though not entirely eliminated (Adeniji 2009). Standard costing is one of the oldest accounting technique used by comparing actual performance against the standards for all areas of operations within an organization.

When actual performance takes place, the actual data are compared with standards to know if there is a difference or no, if there is a difference between actual and standards, the deviation of actual from standard is called ‘variance’. Such variance, maybe ‘favorable’ or ‘Adverse’ for the organization but there is need to look for the reason or cause of this variance.

It a very important systems within the manufacturing companies to control costs by planning and control the use of resources through planning the productive process and then the production cost information that facilitates control over the elements of costs through standards when comparing the actual and the planned costs (Appelbaum et al., 2017 & Abdullahi & Mansour 2015).

According to Okeke A. (2001), In order to control the cost of manufacturing companies, clear information on cost should be made available such as: what cost should be incurred, what cost was actually incurred, what is the variance between what was and what should have been, why the variance and what remedial action should be taken to ensure that the actual occurrence agree with the planned or that the variance is favorable.

Standard costing involves a comparison of quantity and qualitative values. Standard costing is one of the reference points for the measurement of the performances of manufacturing companies. Standard costing is concerned with measures of efficiency, which describes how managers can have control over the acquisition and use of resources in producing a given quality of output.

According Lucey T. (2002), standard costing is a technique which establishes pre-determined cost or estimates of the cost of products and then compares these pre-determined costs with actual costs as they incurred. Standard cost represents an estimated or pre determines total cost of product per unit for manufacturing companies.

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, it has been of vital importance for planning and control exercise of manufacturing companies.

These standard costs reveals the focus, actions and efforts for efficient and effective management of manufacturing companies and equally facilitates checks such that exceptional profit oriented goal performance can be achieved and the reserve adequate punishment to be exercised for bad performance. Standard cost analysis to be made over production facilities and form management intentions and capabilities.

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. The standard cost evaluation is done on a document called the standard cost card (Drury DC. 2002).

1.2 Problem statement

The effect of standard costing on profitability has been a problem to manufacturing companies in the world. Standard costing is a tool for either improving or not improving the profitability of manufacturing companies.

The growing competition puts manufacturing companies before the major challenges of if it is to achieve profitability and enhances the continuity and the level of high-quality production, so these manufacturing companies look for appropriate means to reduce costs, due to the shortcomings they face within and out of the company.

With this, they turn to charge the total costs on the final product through traditional methods that neglect the causal relationship in the allocation of costs and without cost standards that are prepared in advance to facilitate the cost control process and cost evaluation (Allen D. 1995).

The standard costing system may and may not enable manufacturing companies in Buea to effectively manage and control costs, which may help reduce costs and increase profitability and thus improve the effective management of these manufacturing companies.

There is high need to study manufacturing companies because it serves and affects all segments or departments of society and contribute to the national economy of the state, and requires continuing financial stability and better profitability at the lowest cost, and requires that the effective work of accounting and science through the costs systems should be  able to manage and control Production costs, which facilitates planning, realization, measurement, and maximization of profit, especially since the cost systems applied in manufacturing companies do not achieve this goal (Drury, 2013).

According to Ama G. (2001), Cost of production has been at an increase in manufacturing companies of the economy which in effect has resulted to high prices of manufactured goods as a result of increase in production cost. In effect, little or no increase in the level of supply has been recorded by manufacturing companies as the buyer’s purchasing power could no longer meet up with the rising price level which is mostly caused by increase in production cost. This has decreased profitability resulting from increased costs.

Greater efforts should be made to keep cost to the lowest minimum through efficient and effective utilization of both human and material resources within the manufacturing companies. In effect, greater cost reduction and profit optimization will be achieved through setting reliable standards, ensuring that such standards are measured, controlled and variances not adversely very significant without proper cause. The system helps in cost reduction to increase profitability of manufacturing companies.

Another major problem centers on lack of adequate and effective control of resources by 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 which in turn leads to increase in transportation cost. Along the line, most manufacturers do not have adequate control over the resources. Hence the importance of this study is: Examine the extent to which the standard costs can affect the profitability and of manufacturing companies in the municipality of Buea.

1.3 Research Questions

1.3.1 Main Research Question

What is the effect of standard costing on the profitability of manufacturing companies in the municipality of Buea?

1.3.2 Specific Research Questions

1. What is the effect of cost estimation on the profitability of manufacturing companies?
2. What is the effect of cost planning on the profitability of manufacturing companies?

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