CHAPTER ONE
- INTRODUCTION
Standard costing is a performance appraisal technique used by comparing actual performance against the standards for all areas of operations with the organization. This is done in discussion with various heads of organization segments. When actual performance takes place, the actual data are compared with standards; if there is a difference between actual and standards, the difference is analysed to find reason thereof. Deviation of actual from standard is called ‘variance’. Such variance, maybe ‘favourable’ or ‘Adverse’ for the organization Abdullahi, (2014). Controlling cost involves providing clear cut information on what the cost should be incurred, what the cost was actually incurred, what is the variance between what was and what should have been, why and what remedial action should be taken to ensure that the actual occurrence agree with the planned. Standard costing is a measure of comparison for quantity and qualitative values. It is a normal reference point for re-evaluation of performance. It has also been variously referred to as the preparation and the use of standard cost and measurement at the points of incidence Okoye, (2013). 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.
- BACKGROUND TO THE STUDY
Standard costs are usually associated with a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer’s inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variances.
The effect of standard of standard costing on profitability has been a problem to manufacturing companies in Nigeria. The standard costing as a tool for either improving or not improving profitability. Unlike its contemporaries in the field of science, it deals with human beings and calculation significant information.
Lucey (2002) defined standard costing as a predetermined calculation of how much cost should be under specified working conditions; which establishes pre-determined cost and estimates of the cost of products and services, then compares these pre-determined costs with actual costs as they are incurred. Standard cost represents an estimated or pre determines total cost of product per unit for an organization. Adeniji (2009) states 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, yardstick has been of vital importance for planning and control exercise. As a matter of fact, problems associated with production and earning a profit was recognized for many years before the concept of standard costing was invented. Standard costing appeared in the early twentieth century when transaction volumes were always overwhelming the record keeping system used then. Since then, prevalent use of computer systems and automated data entry systems have reduced the need for standard costing, though not entirely eliminated.
These standard costs reveals goals, spur actions and efforts for effective management and equally provide checks such that exceptional profit oriented goal performance can be achieved and reserve adequate punishment to be exercised for bad performance. Standard cost cause appraisal to be made over production facilities and form management intentions and capabilities and is a first step strength and weakness appraisal. 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 cost nor historical cost but standard or planning cost and their variances.
1.2 STATEMENT OF THE PROBLEM
In Nigeria today, the economy is extremely bad. In this respect, a lot of measures have been taken in the past to reverse the declining economic situation. Among the measures taken to revamp the economy include;
- Structural adjustment program (SAP)
- Second tier foreign exchange market
- Ban on importation etc
These measures have adverse effect on the buying attitude of the consumers. Cost of production has increased in manufacturing sector of the economy which in effect has resulted to high prices of manufacturing goods. In effect, no appreciable level of demand could be recorded by most manufacturers as the buyer’s purchasing power could no longer meet up with the rising price level. Most of the manufactured products were consumed by civil servants, public servants and other wage earners whose take home or pay can no longer take them home. In this regards, consumers utilize their little purchasing power mainly on foodstuff to sustain themselves first before luxury. With the economic recession, greater efforts should be made to keep cost to the lowest minimum through efficient and effective utilization of both human and material resources. The above mentioned does not end it all, other problems confronting the manufacturing sector are: Irregular Power Supply, Inadequate water supply, Bad roads, Foreign competition, etc.