Effects of Standard Costing on the Profitability of Manufacturing Companies

Effects of Standard Costing on the Profitability of Manufacturing Companies.


The topic of this research is the effects of standard costing on the profitability of a manufacturing company. The purpose of this study was to discover if the application of standard costing techniques has any effect on profitability, to explore the relationship between standard costing and the profitability of manufacturing companies, and also to determine whether standard costing techniques and principles are being adopted and practiced in Nigerian manufacturing companies (Nigerian breweries, Ama Eke, Udi local government of Enugu state).

The design of this study is descriptive survey method and the study was conducted at Nigerian breweries, Ama which is the case study of this research work.

The instrument of data collection was analyzed using the chi-square method. The researcher discovered the following as her data findings that proper accounting records are kept and are significantly necessary for the management of the company.

That the company employs standard costing in costing their product and decisions are made with the standard costing information obtained in the company.

That accounting reports are prepared and presented to the company’s management and that actions are taken promptly on the information given in the report. That effective application of standard costing has an effect on the profitability of the company.

That the company benefits in a significant way through the use of standard costing especially in the improvement of profit.

The researcher came to the conclusion that standard costing is widely used in Nigerian manufacturing companies and that standard costing enhances adequate planning, control, and decision-making processes in the company.

That standard costing aids manufacturing companies in the elimination of unprofitable products, provision of cost information, and cost control.


Approval page ii
Dedication- ii
Acknowledgment iii
Abstract iv

1.1 Background of study 1
1.2 Statement of the problem 3
1.3 Objectives of study 6
1.4 Research questions- 6
1.5 Hypothesis of study 7
1.6 Significance of study 8
1.7 Scope and limitation of study 9
1.8 Definition of terms 10
References 14

Literature review
2.1 Concept of standard costing 15
2.2 Features of standard costing 21
2.3 Advantages and disadvantages of standard costing 36
2.4 Concept of profitability 39
2.5 Profit and profitability 42
2.6 Measurement of profit 46
2.7 Areas where standard costing improve profitability 47
2.8 Brief historical background of the case study 54
References 61

Research design and methodology
3.1 Research design 63
3.2 Sources of data 63
3.3 Research instrument 65
3.4 Reliability /validity of research instrument 65
3.5 Population 66
3.6 Sample size / techniques 67
3.7 Administration of research instrument 69
3.8 Method of data analysis 70
3.9 Decision criterion for validation of hypothesis 70
References 72

Data presentation and analysis
4.1 Data presentation 73
4.2 Testing of hypothesis 92

Summary of findings, conclusions, and recommendation
5.1 Summary of findings 102
5.2 Conclusions 103
5.3 Recommendations 105
Bibliography 107
Appendix 109



The effect of standard costing on profitability has been a problem for manufacturing companies in Nigeria.

Standard costing is 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) defines standard costing as a technique that establishes pre-determined cost estimates of the cost of products and services and then compares these pre-determined costs with actual costs as they incurred. Standard cost represent am estimated or pre determines the total cost of product per unit for an organization.

Adeniji (2009) argues that the process of estimating the total cost of production per unit is described as a 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, problem 2 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 overwhelming the record-keeping system in the use at that time.

Since then, the prevalent use of computer systems and automated data entry systems have reduced the need for standard costing, though not entirely eliminated.

These standard costs reveal goals, spur actions and efforts for effective management and equally provide checks such that exceptional profit-oriented goal performance can be achieved and the reserve adequate punishment to be exercised for bad performance. Standard cost causes 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 for a standard costing system in the 1920s. it was brought into the system such that total variances might be accumulated as well as detailed variances. These steps gave rise to the formal expression that significant costs were not actual and historical costs but standard or planning costs and their variances.


Adeniji, A. A. (2009). Cost Accounting, A Managerial Approach. Lagos State, Nigeria: El- Toda Ventures limited publishers.
Ama, G. A. N. (2001). Management and Cost Accounting: Current Theory and Practice. Abia State, Nigeria: Amasons publishers ventures.
Bordens, K., & Abbot, B. (2002). Research Designs and Methods, A Process Approach. New York. McGraw-Hill publishers.
Drury, C. (2002). Management and cost accounting. London. Thomson Learning Publishers. Emekekwue, P. E. (2008). 6 th Edition, Corporate Financial Management. Kinshasa. African Bureau of Educational Sciences.
Eyisi, S. A. (2009). Cost Accounting: Theories and Practice. Enugu. Ayibest Publishers.
Eze, J. C., & Ani, W. U.(2009). Intermediate Cost Accounting. Enugu: JTC Publishers.
Eze, O., & Agbo, B. (2005). Research Methods: Basic Issues and Methodology. Enugu State. Benalice Publications.
Ezeamama, M. .C. (2010). Fundamentals of Financial Management: A Practical Guide. Enugu. Ema Press Limited
Lucey, T. (2002). 6 th edition, Costing. New York: Biddles Limited, Guildford and King’s Lynn.
Nweze, A. U. (2010). 4 th Edition, Quantitative Approach to Management Accounting.. Enugu State, Nigeria: Computer Edge Publishers.

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