THE EVALUATION OF COSTING SYSTEM IN SMALL AND MEDIUM SCALE ENTERPRISES

THE EVALUATION OF COSTING SYSTEM IN SMALL AND MEDIUM SCALE ENTERPRISES

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

A system according to O’Brien (1990:8), is a group of interrelated components working together towards a common goal by accepting inputs and producing outputs in an organized transformation process. An accounting system is a formal means of gathering and communicating data to aid and co-ordinate collective decisions in the light of overall goals or objectives of an organization. The major system is the major quantitative information system in almost every organization (Hongem and Sondem, 1987). 

A cost accounting system is the basis of an internal financial information system to assist managers to make business decisions. The types of business decision will vary with the nature of the organization. The cost accounting system is concern with accumulating cost for inventory valuation to meet external financial accounting and internal monthly or quarterly profit measurement requirements. Biggs (1972), release the importance of cost account and stated that without a system of cost account, it is doubtful whether a business of any size can survive in the intensely competitive condition of today, but it must be emphasized that just as no two businesses are alike, even in the same industry, son no ready-made system of cost account can be provided to suit each and every business. 

The underlying principles, convention and objects of all costing system are the same but the applications of these principles are methods by which the objects are to be achieved must vary with circumstances. Obara and Ukpai (2001), states that the maintenance of improper and inadequate records couple with the fact that costing method used, through sometime effective, were unconventional. Costing system keeps a focused eye on expenditure made by the organization, while the data that is collected and generated by the costing is also integrated into the overall accounting system. The information that is typically gathered by a costing system allows owners and managers to identify the current status of two key factors that are relevant to the success of the organization. These are operation cost and performance costs.

Operational costs are often the foundation of the data collected by a costing system. Here, management is able to get a snapshot of all expenditures that are directly connected with the general operation of the organization, especially in terms of production costs. In performance cost, management is able to view any and all expenditures that are related to helping the organization remain profitable, less the direct cost of operations.

Generally, there is no consensus on the definition or nature of small scale business worldwide. Considerable tozzines persists about what the term denotes. Different countries, institutions and individuals have put forward various descriptions of small business based on some parameter. Osaze (1986), sees small business as one which is owned, managed, controlled by one or two persons, is family influenced in decision making, has an undifferentiated organization structure, has a relatively small share of the market and employs less than fifty (50) peoples.

The importance of cost accounting information to the survival of small and medium enterprise (SMES) cannot be over-emphasized. Nwachukwu (1990), in this regard wrote that for an entrepreneur, the most important aspect of his information comes from financial accounting. This is brief is the score card that consists of balance sheet, income statement and other supporting documents. They are indicators of growth potentials, earning ability, liquidity and stability.

Unlike the accounting system that helps in the preparation of financial reports periodically, the cost accounting system and reports are not subject to rules and standard like the general accepted accounting principles (GAAP). As a result, there is wide variety in the cost accounting system of different companies and sometimes even in part of the same company or organization.

1.2     STATEMENT OF THE PROBLEM

It is sometimes said that information is useful data that is provided for someone to use for a specific purpose and that, unless it is suitable for that purpose, it is worthless.

Information on the cost incurred in producing and selling individual product or services is not readily available in the financial accounting records. When a business produce different products, or render services, without such information it managers cannot make sensible decision about controlling costs and maximizing the profit earned from a particular line of products or services. Also to know the profitability of any decision, there must be an understanding of cost. To obtain this information promptly, a mechanism of recording transactions within the business is required.

According to Lasser (1967), half of the small business failures studied are due to poor and inadequate method of costing of their raw materials, labour and over-head. Poor costing of products and services hinder management from achieving their goals also, poor decision making by the entrepreneur on cost control is the bane of the small business. Furthermore, Johnson and Kaplan (1987), opine cost accounting as one of the major reasons for failure of business. They stated that cost accounting data were relevant, not timely and inaccurate.

According to Cooper and Kaplan (1998), an ineffective cost system will not indicate to the management of small scale business any inefficient and the extent of various forms of waste, whether of materials, time, expenses or in the use of machine equipment and tools; they also stated that a poor costing system may not reveal sources of economics in production having regards to methods, types of equipment, design, output and layout, daily, weekly, monthly or quarterly information (reports) that may be necessary to ensure prompt corrective action. In addition, a poor costing method may not provide actual figures of cost for comparison with estimates, and may not serve as a guide for future estimate, or even assist management in their price faxing policy. It is in the light of these operational crisis faced by small and medium enterprises that the need to carry out a study on the topical issue arose.

1.3     PURPOSE OF THE STUDY

The main purpose of this study is to evaluate the effectiveness and efficient of costing in small and medium scale enterprises. In so doing the researcher intends going on indepth information and analysis on the various strategies through which costing system can be effective and efficient in small and medium scale enterprises.

1.4     OBJECTIVE OF THE STUDY

  1. Examine the relationship between costing system and attainment of management goals.
  2. Examine the relationship between costing system and profitability.
  3. Assess the relationship between costing and inventory valuation.

1.5     RESEARCH QUESTION

It cannot be emphasized too strongly that if the information produced by the costing system is not useful for management decision making, control or planning then it is has no value and should not be prepared. The following research questions are raised for the purpose of this study:

  1. Is there any relationship between costing system and profit ability?
  2. Is there any relationship between costing system and attainment of management goals?
  3. Is there any relationship between costing system and inventory valuation?

 

 

1.6     SIGNIFICANCE OF THE STUDY

This study gives a clear insight into the various ways in which costing system can be executed efficiently to still favour small and medium scale enterprises and how some costing principles can be properly tackled. This study also gives a cleat insight on how improper or ineffective costing has led to the fail in small and medium scale enterprises in Nigeria.

The findings and recommendations of this researcher will help in building a strong and better costing system for small and medium scale enterprises in Nigeria.

1.7     SCOPE OF THE STUDY

The study is targeted at evaluating the effectiveness and efficiency of costing system in small and medium scale enterprises in Uyo, using three (3) selected business from Uyo metropolis, in relation to their cost accounting system as a study.

The three (3) small and medium scale enterprises chosen include:

  1. Fast food business outlets
  2. Electronics and other accessories business
  3. Transportation agency business

Also the system covered the period of five (5) years, ranging from 2008 to 2013.

1.8     LIMITATION OF THE STUDY

In the course of carrying out this research work, the limitations encountered by the researcher are discussed below.

Time has proven a limiting factor in specific, in that this research project is expected to be completed in one semester. Also, the assignment of supervisors was done mid second semester. In addition, in the cause of the research work, the researcher encountered dividend attention as a result of combining two courses offered for the semester and a seminar paper.

Furthermore materials (information) from primary source was not sufficient for the research work. Hence, the researcher resort to the use of secondary sources as well.

1.9     DEFINITION OF TERMS

The definition of terms has to do with explaining the main terms in the research work, the definition of terms are as follows:

  1. Cost Costing: This is a part of management accounting which establishes budget and standard costs and actual costs of operation process, departments, or products and the analysis of variances, profitability or social use of funds. It is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and they as certainment of  profitability (ICMA).
  2. Cost Accumulation: This is the collection of cost in some organized way be means of an accountancy system (Adenji, 2009).
  3. Cost Apportionment: The division of cost among two or more cost centers in proportion to the estimated benefits received using a proxy e.g square feet (ICMA).
  4. Cost Control: The regulation of cost of operating a business and is concerned with keeping cost within acceptable limits. Those limits will usually be specified as a standard cost (Adenji, 2008:65).
  5. Overhead: Also referred to as indirect cost. It represents summation of indirect material cost, direct labour cost and indirect expenses (Adenji, 2009:486).
  6. Standard Cost: Are predetermined cost, they are tagged costs that should incurred under efficient operation conditions (Drory, 2008:418).
  7. Performance Cost: Refers to any and all expenditures that are related to helping the organization remain profitable less the direct cost of operation.

Cost Unit: This is a unit of output or service to which cost can be ascertained and changed to. Example unit of production includes ratio set, a job, a contract etc. (Etton, 2003:33).

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