1.1 BACKGROUND OF THE STUDY
A major problem facing manufacturing companies in Nigeria is the growing trend of marginal costs which erodes business profit and leads to constant shut down of factory (Ogbadu, 2000). This has led to a lot of brewery firms in Nigeria closing down manufacturing. For instance, the number of breweries in Nigeria in 1990’s was about thirty three with total capacity of 20 million hectolitres but at present only about four of these Breweries are still operational. However, production fell marginally in 1997 and 1998 due to restriction on the import of barley malt and problems associated with the use of locally produced substitute. During this period capacity utilization fell to about 30% (Equity Research Report, 2006). The brewery industry has contributed immensely to the growth and development of Nigerian economy. Ola (2001) noted that this sector contributes about 28% of Manufactured Value Added (MVA) and provides direct employment for over twenty-five thousand persons. The indirect employment associated with the industry is close to 300,000 including the firms producing ancillary services. The banning of the importation of barley by the federal government of Nigeria in 1997 and 1998 encouraged local farmers and agricultural research institutes in the country to massively produce substitute grains like sorghum, maize etc to satisfy the needs of the breweries industry. This indeed enhanced the economic power of farmers, and further increased employment. The above economic benefit of the Brewery industry can only be sustained when the brewery firms make profit which ensures their remaining in business. The continuous shutting down of brewery firms because of high cost of inputs hinders the economic growth and development of the nation. Equity Research Report (2006) opined that the main threats to the firms in the industry include rising cost of petroleum products and cost of raw materials such as barley (imported with high excise costs). The ban on the importation of barley and the replacement of barley malt with local substitutes have further increased the input cost of beer production. Packaging rates are higher, storage and transportation costs have increased drastically. Yin Xia (2003) noted that wage rate rose relative to both capital and material prices until 1990. Thereafter, wages fell relative to capital but continued to rise relative to material prices. Marginal costing is formally defined as the accounting system in which variable cost are changed to units and fixed cost of the period are written off in full against the aggregate contribution. Its special value is in decision making. The term marginal cost is sometimes refers as the marginal cost per unit and sometimes to the total marginal cost of the department or batch or operation. The meaning is usually clear from the context. The marginal cost of a product “is its variable cost” this is normally taken to be direct materials, direct expenses and the variable part of overheads. Walter (2002) sees marginal costing not as a system of cost ascertainment on the same lines as job, operating or process costing, but is rather a technique to deal with the effect on profits of changes in volume or type of output. He went further to explain that “fixed” in relation of time and in fact they tend to vary in relation to the length of the period covered. Recently the common concern to every participant in a market economy is the magnitude at which price of goods are multiplied in recent time in Nigeria. This is in addition to the multiplier effects associated with the process of transacting business in Nigeria for instance as customers complain bitterly of exorbitant prices likewise Brewery firms remain worried about how profitability returns in the face of ever increasing competition. Even low buying power of customer, low capacity utilization and international market are characterized by differentiated products. As a result customers shift from one product to another in search of value that rarely comes despites their reaches to purchase. They are all confronted with higher price low quality adulteration and at times temporary scarcity in place of value for money objectives they pursue. The management of different companies also seeks for cover everywhere to justify low profitability return while trying to checkmate competition and its resultant effect on financial performance caused by product proliferation and limitations. 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. Given the important contributions of the brewery sector to the economy, this research therefore deems it necessary to evaluate the effect of marginal costs on the financial performance of brewing firms in Nigeria.
1.2 STATEMENT OF PROBLEM
The problem with calculating the contribution of various products made by a company is that it may not be clear whether the contribution earned by each product in enough to cover fixed cost where as by charging fixed overhead to a product we can decide whether it is profitable or not. This research is primarily carried out by marginal cost elements available to some Brewery firms in Nigeria more also it goes ahead to relate the financial performance of these Brewery firms to direct material direct labour and overhead respectively. Hence the research aims at evaluating financial performance of brewery firms using the marginal cost element as a yard stick. Marginal costing is a techniques used in reporting costs and profit of a firm. There should be separation of cost into fixed and variable costs. In marginal costing product cost include variable production cost such has direct material, direct labour, direct production overhead expenses. It ignores fixed cost and semi-variable cost. The separation of cost into fixed and variable cost is difficult, in reality manufacturing can’t take place without plant facilities and equipment hence fixed manufacturing cost are part of the production and should not be excluded. Marginal costing fail as to take into consideration that in the long run, fixed cost will be part of the total cost of production than of a unit of an item. It is therefore not an appropriate tool in making pricing decision of a firm. In the preparation of profit and loss account, the use of marginal cost is limited to the internal parties of a firm such as the management. In computing profit for tax purpose, marginal costing is not accepted method, because it does not include all cost used in production process. Therefore in preparation of profit and loss account meant for external uses such as shareholder investors, government and the public, using marginal costing will not present true and fair view of the financial affairs of the firm.
1.3AIMS OF THE STUDY
The major purpose of this study is to examine the relationship between marginal cost and financial performance brewery firms. Other general objectives of the study are:
1. To examine the meaning and principle on which marginal costing operates.
2. To examine the application of the basic principles of marginal costing techniques in brewery firms in Nigeria
3. To find a way of controlling cost in order to break even as well as to help the cost accounting system of the brewery firms in Nigeria.
4. To examine the effect of marginal cost elements on financial performance of brewery firms in Nigeria.
5. To examine the relationship between marginal cost elements and financial performance of brewery firms in Nigeria.
6. To recommend strategies those marginal cost elements can be used in making pricing decision of a firm.
1.3 RESEARCH QUESTIONS
1. What is the meaning and principle on which marginal costing operates?
2. How is the application of the basic principles of marginal costing techniques in brewery firms in Nigeria?
3. What are the ways of controlling cost in order to break even as well as to help the cost accounting system of the brewery firms in Nigeria?
4. What are the effects of marginal cost elements on financial performance of brewery firms in Nigeria?
5. What is the relationship between marginal cost elements and financial performance of brewery firms in Nigeria?
6. What are the strategies those marginal cost elements can be used in making pricing decision of a firm.
1.5 RESEARCH HYPOTHESES
H0: There is no effect of marginal cost elements on financial performance of brewery firms in Nigeria.
H1: There is a significant effect of marginal cost elements on financial performance of brewery firms in Nigeria.
H0: There is no relationship between marginal cost elements and financial performance of brewery firms in Nigeria.
H1: There is a significant relationship between marginal cost elements and financial performance of brewery firms in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This research work on the relationship between marginal cost and financial performance of brewery firms in Nigeria will be of immense importance to students in accounting firms, as it will serve as an eye opener to them. The study will also be of great importance to brewery firms in Nigeria since this research work will investigate the relevance of marginal costing on raw material cost, Direct overhead and direct labour cost.
1.7SCOPE OF THE STUDY
The study is based on influence of development programmes of employee productivity in small and medium enterprises.
1.8 LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.8 DEFINITION OF TERMS
Marginal Cost: Is the change in the total cost that arises when the quantity produced is incremented by one unit; that is; it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost.
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