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THE RELEVANCE AND APPLICATION OF STANDARDS COSTING IN A MANUFACTURING INDUSTRY.

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

It is generally claimed that Nigerian manufacturing industries are growing geometrically and there is public critisms against this claim ranging from inefficiency of labor, waste of raw materials unpredictability, investment decision error etc. The purpose of this study is therefore to clearly identify the importance and relevance of standard costing in a manufacturing companies and its contribution so far. However without a pure definition of the subject matter (Standard costing) and its explanation some readers may not easily understand its relevance and application in a manufacturing industry. Standard costing is defined as a system of cost accounting which makes use of pre – determined cost relating to each element of cost layout, material and over head for each service supplied. (Nweze, 1998:86).

Actual costs incurred and compared with the standard cost as the work proceeds, and the difference between the two is known as variance. And before standard cost can be calculated, there must be considered a number of basic condition which determined the standard cost which should be calculated (Nwoha and Ekwe, 1999:161). Alternatively standard costing relate to the cost and quality of inputs used in manufacturing goods or providing services (Garrison 1989:130).

          Cost first developed is concerned primarily with recording and analyzing of historical this is to say, the actual cost which had already been uncured. It was soon realized that historical cost possessed some considerable disadvantages and limitation. for example, the actual cost of product of an article no matter how accurately it may have bee recorded provides no indication of the degree of efficiency with which has been provided, neither does it give any information about what the cost of production ought to have been or about what it could have been under different conditions of manufacturing.

          Standard costing set out to determine what cost of production ought to be or could be under defined condition of production (Lucey, 1996:49). For example, the introduction of structural adjustment programme (SAP) by the federal government of Nigeria on 26 June 1986 made some manufacturing industries to be very conscious of economic waste in their

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