CHAPTER ONE

INTRODUCTION

1.1.1 BACKGROUND OF THE STUDY

Organization that deal basically in the manufacturing of goods or the transformation of

raw materials to finished goods, may find it expedient to determine the cost incurred at every

stage of production.

However, as a result of the need to meet this requirement the aforementioned subject

matter emerged “process costs’. It literary refers to accounting for cost of processes, process

costing is a costing technique used. it is not possible to identify separate units of production or

jobs, usually because of the continuous nature of the production process involved.

Process costing peculiar with continuous production can be identified in the following

areas oil refining, paper, food, drinks, and chemicals etc it may also be associated with the

continuous production of large volumes of cost items such as cans or tins.

Brief History of Guinness Nigeria Plc

Guinness Nigeria, is a subsidiary of Diageo Plc of the United Kingdom, the Company

was founded in 29th April 1950 and was incorporated in 1962 with the building of a brewery in

Ikeja, the heart of Lagos. the brewery was the first Guinness operation outside Ireland and Great

Bristain.

Guinness is one of the leading alcoholic and non-alcoholic beverage companies in

Nigeria with the dominant market share in the stout segment the company’s strong market share

in the brewing industry in Nigeria is supported by a good brand name, technical and product

quality assistance from its parent company. They produce alcoholic and non-alcoholic beverages

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comprising stout (Guinness foreign extra stout and Guinness extra smooth), lager (Harp,

Satzenbrau Pilsner and Dubic), malt (Malta Guinness, Malta Guinness low sugar, Dubic),

flavored Alcoholic Beverages (Smirnoff ice, Smirnoff ice Double black with Guarana, Snapp

and Aluaro) Spirts and bitters (Master’s choice origin mixed drink and origin bitters).

1.2 STATEMENT OF RESEARCH PROBLEM

The complexity involved in accounting for manufacturing products at various stages and

the rising level of competition in the brewery industry will increase the problem of the

application of process costing system in the manufacturing operation of Guinness Nigeria PLC,

Moreover, the following can be said to be the expected problem to be experienced in the course

of this research.

1) The failure of Guinness Nigeria Plc to apply process costing system to their

manufacturing operation

2) The treatment for the normal and abnormal loss-Treatment of normal loss require the

determination of a predetermined percentage of loss from the input material, the

predetermined percentage is sometimes, subjective and inaccurate. Equally, indepth

knowledge of accounting is required in passing entries involving abnormal loss.

3) The preparation of the process account involves a little bit of technicality. Process

costing involves preparation of separate account for each process, thus calling for

some sort of professionalism.

4) The accounting procedure required for the major expenditures.

5) The problem posed in the valuation of work in progress and the conversion of

production cost to equivalent unit.

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 6) Lack of adequate records of material issued to process per labor booking and

absorption of overheads to processes.

1.3 RESEARCH QUESTION

a) Why is it necessary to apply process costing to the manufacturing operation of Guinness

Plc?

b) What are the treatment require for the normal and abnormal loss and how these are

minimized?

c) What are the complexities encountered in the preparation of process accounts?

d) How do you account for major expenses in process costing system?

e) What is the most effective and efficient method for the valuation of work in progress?

f) How do we keep proper records of material, labour, and overhead charged to each

process?

1.4 RESEARCH OBJECTIVE

i. The prime objective of this research will be to evaluate the effect of process costing on

the overall unit cost production of products.

ii. To make appropriate recommendation as to what would make the application of process

cost more efficient and effective in the operation of Guinness Nigeria Plc.

iii. To aid the management Guinness Plc to determine the material, labour and overhead cost

required as input for each process and also enable them to determine the unit cost of the

production process at the end of the final process.

iv. The study will enable the company to embark on performance evaluation of each process

to ensure that production manager imbibe the spirit of cost consciousness.

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1.5 RESEARCH HYPOTHESIS

The following hypothesis will be especially tested to analyze the relationship of some of

the major variable involved in the study.

Hypothesis I

Null Hypothesis Ho Guinness Plc does not apply process costing system in their manufacturing

operation.

Alternative Hypothesis H1: Guinness Plc do apply process costing system in their

manufacturing operation.

Hypothesis II

Null hypothesis Ho: Determination of unit cost of each process does not significantly affect

production and profits sales of product.

Alternative Hypothesis HI: Determination of unit cost of affects production and profit sales of

product.

Hypothesis III

Null Hypothesis Ho: There is no different between manufacturing industries that apply process

costing system to their operation and those that does not apply process costing to their operation.

Alternative Hypothesis Hi: There is difference between manufacturing industries that apply

process costing system to their operation and those manufacturing industries that do not apply

process costing system to their operation.

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1.6 SCOPE OF THE STUDY

The scope of the study is specifically limited to process costing system being operated in

Guinness Plc. The study will cover the preparation of process costing account to determine unit

cost, the treatment of losses and gain involved in process costing. The study will observe the

application of process costing in the manufacturing operation of Guinness Nigeria Plc.

1.7 SIGNIFICANCE OF THE STUDY

The significance of this work cannot be over emphasized, however it can be observed in

the following areas;

This study will evaluate the most effective and efficient means of determining the unit

cost of goods and services that are produced or provided in a sequential manner. It will also

proffer suggestions to problems peculiar with process costing such as Work In Progress,

abnormal and normal losses, abnormal gain, and equivalent unit of production.

This research will accord the tax administration arm of the government standardized basis

of ascertaining the unit cost of goods and services that are produced in a sequential manner, thus

affecting the determination of profit which is vital in administering taxes.

A study in the aforementioned subject matter will enhance government in fixing the

minimal and maximum prices of goods and services which they deem fit necessary since a

standardized form of ascertaining the cost of production have been highlighted.

This research will enable potential researchers to examine the limitations of this mode of

costing as such prescribe flash points to be noted when observing this costing technique and

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prescribe proactive actions that may be taken to enhance the application of this costing

technique.

Process costing will enable the management of Guinness Plc to determine material, labor

and overhead cost required as input for each process, it will also enable them to ascertain the unit

cost at the end of the final process as such enhancing the management in fixing the unit selling

price of its products which pose very vital in the preparation of their selling price budget.

1.8 OPERATION DEFINITION OF TERMS

Abnormal Losses: These are profits that are unexpected and avoidable it is the positive

difference between the expected output and actual output.

Costing: This is the process of accounting for costs

Defective Unit: These are goods produced that does not meet quality standard and therefore

reprocessed.

Finished Goods: These are goods produced that finally emerge at the end of the production.

Process Costing: This is a costing method used where it is not possible to identify separate units

of production or jobs, usually because of the continuous nature of the production process

involved.

Work in Progress: These are semi-finished products it is the product that is yet to be completely

transformed by the production process.

Process Account: This is a ledger in which the labour material and overhead charged to each

process is recorded and it is used to ascertain the unit cost of products.

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Profit: This is the difference between the selling price of a product or service and the cost of

production of such product or service.

Waste: These are losses with no measurable recoverable value.

Spoilage: These are goods produced that does not meet quality standard and therefore sold.

Selling Price: This is the value ascribed to a product or service.

First in First Out: It is a method of valuation of work in progress where unit brought forward

are assumed to be completed first before other are processes.

Variation: This is the difference between standard and actual level of activity of a product or

service.

S.I Unit: International Standard unit

Cost Variance: The difference between the standard cost and actual cost of a product or service

is called out variance.

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 REFERENCES

Adewinle, Olajide. (2004): Research work on process costing

Akinsanya, Du. (1969). “How Guinness came into being” the people. 26

Brock and Palmer (2001): Costs account principles and application, Mc raw Hill Book Company
Second edition

Development: Guinness in Nigeria “West African Builder and Architect: 57. 1963. ISSN. 0043-
2980 Oclc 32562858

Lucey, (2004): First course in Cost and management Accounting DP publishing LTD.

Mayo, (2005): Bpp ICAN Study tests on Cost Accounting

“NSC Listed companies” Archived from the original on July 31, 2012. Retrieved August 31,
2012.

Omolehinwa, Eddy. (2008): Coping with cost Accounting, Pumark Nigeria LTD Second Edition.

Study, Pye. (2008): Cost Accounting and Budgeting, Student outline of theory and problems of
statistics in SI units, New Yorks Mc Graw Hill publishing COLTD.