African Training and Research ‫اﻟﻤﺮآﺰ اﻹﻓﺮﻳﻘﻲ ﻟﻠﺘﺪرﻳﺐ‬ Centre Africain de Formation et

Centre in Administration for ‫و اﻟﺒﺤﺚ اﻹداري ﻟﻺﻧﻤﺎء‬ de Recherche Administratives

Development pour le Développement

C.A.F.R.A.D.
African Training and Research Centre
in Administration for Development

Cost Accounting Practice in the informal Sector

of Nigeria : A Survey of Eastern business Zone

By : Lawyer C. OBARA and Ndukwe A. UKPAI

Tangier
Morocco - 2001

Bd. Mohammed V, Pavillon International Tel: (212) 61 30 72 69 - Fax: (212) 39 32 57 85 Bd. Mohammed V, Pavillon International
P.O. Box 310, Tangier, 90001 Morocco E-Mail : cafrad@cafrad.org B.P. 310 Tanger, 90001 Maroc
Web Site: http://www.cafrad.org
Cost Accounting Practice in the Informal Sector of Nigeria

ABSTRACT
Cost accounting is a veritable tool in the management of any organization including those in the
informal sector. Analyzed data from the respondents to our research instruments, indicated the
maintenance of improper and inadequate records coupled with the fact that costing methods used,
though sometimes effective, were unconventional. The informal businesses will approach profit
maximization levels if effective cost control procedures are established and appropriate books of
accounts installed. We suggest therefore that since these artisans may not be able to afford the
employment of qualified and experienced accountants, they can still benefit from the services of
such professionals through consultancy or part-time arrangements.

PREAMBLE
It is axiomatic that continuous existence of all business concerns depends on the efficient and
effective practice of cost accounting. The principal objective of cost accounting is the provision of
detailed information for planning, control and decision making.
There is the recognition that the cost accounting practice in the informal sector of Nigeria is not
without criticism. The current state of cost accounting practice in the informal business in Nigeria
appears inappropriate and therefore ineffectual. There seem to be no relationship between the
costing system and the activities or operations of the entities. Besides, the information provided by
the costing system tend to be doubtful and inaccurate for the intended purpose. Preparation of
exception reports and position statements are not considered necessary. But where they are
prepared, they are not produced at appropriate intervals and early enough to be valid.

NEED FOR A COST ACCOUNTING SYSTEM

An accounting system is a formal means of gathering and communicating data to aid and coordinate
collective decisions in the light of overall goals or objectives of an organization. The accounting
system is the major quantitative information system in almost every organization (Horngren and
Sundem, 1987).
Cost accounting is a formal means of gathering, measuring, analysing, and reporting cost data to aid
management in coordinating collective decisions in the achievement of the overall goals of an
organisation. An effective cost accounting system provides information for two broad purposes:
1. The accumulation of cost data for external reporting.
2. The collection of quantitative data for internal use by management in carrying out its
functions of planning, control, decision making and the formulation of overall policies.
Cost accounting system of an organisation is the foundation of the internal financial information
system. Biggs (1972) realized the importance of cost accounting and stated that without a system of
cost accounts, it is doubtful whether a business of any size can survive in the intensely competitive
conditions of today, but it must be emphasized that just as no two businesses are alike, even in the
same industry, so no ready-made system of cost accounts can be provided to suit each and every
business. The underlying principles, conventions and objects of all costing systems are the same,
but the application of these principles and methods by which the objects are to be achieved must
vary with circumstances. A good cost accounting system should aim at accomplishing the following
purposes :
1. To arrive at the cost of production every unit, job, operation, process, department or
service and develop cost standards.
2. To indicate to the management any inefficiencies and the extent of various forms of
waste, whether of materials, time, expense or in the use of machine equipment and tools.
CAFRAD – African Training and Research Centre in Administration for Development. 2
Cost Accounting Practice in the Informal Sector of Nigeria

Analysis of the causes of unsatisfactory results may indicate remedial action.

3. To reveal sources of economies in production, having regards to methods, types of
equipment, design, output and layout, daily, weekly, monthly or quarterly information
(reports) may be necessary to ensure prompt corrective action;
4. To provide actual figures of cost for comparison with estimates, and to serve as a guide
for future estimates, or quotations, and to assist the management in their price-fixing
policy.
5. To present comparative cost data for different periods and various volumes of production
output, and to provide guidance in the development of the business.
6. To indicate whether the cost of certain parts or components made in the factory is such
that it would be more economical to buy from outside sources.
7. To record the relative production results of each unit of plant and machinery in use as a
basis for examining its efficiency. (Owler and Brown, 1984).

THE INFORMAL SECTOR

Generally speaking, there is no consensus on the definition or nature of small-scale business world
wide. Considerable fuzziness persists about what the term denotes. Different countries, institutions
and individuals have put forwards various descriptions of a small business based on some
parameters.
The economist’s definition of small firms attempted to provide the size of what should be a small
business thus “a small business is one that has only a share of its market, is managed in a
personalized way by its owners or part-owners and not enough medium of an elaborate management
structure and which is not sufficiently large to have access to the capital market for the public issue
or placing of severity”.
The American Small Business Administration (SMA) according to Pickles and Abrahamson
(1976), defined small business as “one which is independently owned and operated and not
dominated in its field of operation”.
Davies (1982) quoted the American Committee for Economic Development (CED) as defining
small business as a form having at least two of the following four key factors:
- Management of the firm must be independent and usually the managers are the proprietors.
- The area of operation must be mainly local with workers and owners living in one home or
community.
- Owners supplied capitals.
- The relative size of the firm with its industry must be small when compared with the
biggest units in the field. These measures can be in terms of sales volume, number of
employees and so on.
The parameters adopted by any country or institution also vary from period to period. In Nigeria,
the situation is not different. Various criteria have also been used for the definition of small scale
business. Asechemie (1992) in trying to define the informal sector wrote that the market traders, the
hawkers on the street, the road side mechanic, the road side barber, and the village farmer are
examples of businesses in the informal sector-different theorists have characterized it differently,
depending on their mode of analysis and the emphasis given to particular element of the sector.
Oshagbemi (1985) argued that; the main criteria used throughout the world to describe small scale
enterprise include:
(a) Number of employees
(b) Sales volume
(c) Financial strength
(d) Relative size
(e) Initial capital outlay

CAFRAD – African Training and Research Centre in Administration for Development. 3

Cost Accounting Practice in the Informal Sector of Nigeria

(f) Independent ownership

What is common to the wide range of information available is that the operations in the sector are
usually in small scale; that production technique is labour intensive and that ownership is usually
private. In most cases the workers in this sector are family members, apprentices and few paid
employees.
However, whatever definition or criteria that may be used to define the informal sector, the informal
sector as a concept and economic reality has come to stay. The interest of academics and policy
makers in the informal sector arises from the perceived potential ot the sector to:
(a) Generate a large volume of employment at low capital cost.
(b) Develop rural Nigeria, and
(c) Contribute to gross domestic product.
The importance of accounting records and information (here accounting records include costing
records) to the survival of these business organizations cannot be overstressed.
Nwachukwu (1990) in this regard wrote that “for an entrepreneur, the most important aspect of his
information comes from financial accounting. This in 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. This points out the important role played by accounting
records in any business organisation no matter the size.
There is no conventional approach to accounting practice by the informal business operators. On
cost accounting, previous studies indicated that, the artisans apply cost to their product based on
discretion, common sense, and sometimes associated with the way of carrying out their business.
Ukpai (1997) in the analysis of cost accounting techniques and the benefits in costing of products
and services of large scale business as well as small scale business, maintained that, for any
business to be a success, there has to be a group of people or persons who should be responsible for
the achievement of the goals of the business. The entrepreneur is the person responsible for the
achievement of the small scale business. He stressed that cost accounting is the basis of decision
making and planning in order to make profit.
According to Lasser (1967) “Half of the small business failure studied are due to poor and
inadequate method of costing of their raw material, labour and overhead to their product, bad record
keeping and too much overhead”. He went on to stress that poor costing of product and services
hinders management form achieving their goals. He noted that one of the factors responsible for the
inadequate costing approach among small scale business, is inadequate knowledge of the
entrepreneur on various management facets. He further explained that poor decision making by the
entrepreneurs on cost control is the bane of the small business.
There is a need for standardised accounting practice in the informal sector. Effort also should be
made to convince the participants of the utility and cost effectiveness of the system.

METHODOLOGY
For the purpose of this study, the country is divided into three (3) industrial zones, namely: Eastern
zone, Western zone and Northern zone. This is to ensure reliability. Therefore, the target population
of this study consists of all the artisans in the Eastern industrial zone. This is the population to
whom the findings of the study are held to be applicable. The accessible population on the other
hand consists of all artisans in Nnewi, Aba and Port Harcourt, engaged in :
1) Motor Vehicle Maintenance (Mechanics)
2) Furniture making
3) Welding
4) Block Moulding
5) Tailoring (Dress making)
6) Refrigeration and Air-conditioning maintenance

CAFRAD – African Training and Research Centre in Administration for Development. 4

Cost Accounting Practice in the Informal Sector of Nigeria

7) Glazing (Aluminum Fabrication and Glazing)

8) Shoe making
9) Leather Bag making and
10) Panel Beating Business.
Nnewi, Aba and Port Harcourt represent the industrial centres of the Eastern zone, where artisans
tend to cluster.
From the above mentioned accessible population, a sample of 150 artisans were selected using non-
probability sampling method. The rationale behind the choice of this sample method is to ease
questionnaire administration and to facilitate collection for the purpose of data analysis.

FINDINGS, ANALYSIS AND DISCUSSIONS

The study revealed that most of the artisans did not keep explicit record of any kind as indicated in
table 1 below.
Table 1: Maintenance of Costing Records

OPTION
Industry Yes No Total
Furniture Makers - 15 15
Mechanics - 15 15
Welders - 15 15
Dress Makers 5 10 15
Block Moulders - 15 15
Aluminium Fabrication/Glaziers 2 13 15
Refrigeration/Air-Conditioning - 15 15
Panel Beaters - 15 15
Shoe Makers 3 12 15
Leather Bag Makers 3 12 15
total 13 137 150
% 9 91 100

Source: Field Work, 1998.

Table 1: Shows that the option “no” 137 or 91 per cent responses.

Through discussions, it was discovered that some did not keep record because they were illiterates;
others because they did not think the size of the business was large enough to warrant explicit
record keeping. Those who kept records did so on job orders, debts owed and owing, sales,
accessories (inventory), and cash. None of them, however, kept this full range of records.
On the costing method adopted by the artisans, this study revealed that the practice of the artisans
conformed with the conventional cost accounting practice, in which each industry adopted a system
peculiar to the industry.
Most of the artisans interview adopted the method which conformed to the practices of the industry;
This is indicated in table 2 below:

CAFRAD – African Training and Research Centre in Administration for Development. 5

Cost Accounting Practice in the Informal Sector of Nigeria

Table 2: Cost Accounting Method(s)

OPTION
Industry Job Batch Contract Process Services Total
Costing Costing Costing Costing Costing
Furniture Makers 8 3 4 - - 15
Mechanics 10 - - - 5 15
Welders 7 3 5 - - 15
Dress Makers 9 4 2 - - 15
Block Moulders - 2 1 12 - 15
Aluminum Fabrication 8 3 4 - - 15
Refrigeration/Air 10 - - - 5 15
Conditioning
Panel Beaters 12 - - - 3 15
Shoe Makers 5 9 - 1 - 15
Leather Bag Makers 5 8 - 2 - 15
Total 74 32 16 15 13 150
% 49.33 21.33 10.67 10 8.67 100

Source: Field work, 1998.

Furniture makers, welders, dress makers, glaziers and shoe makers adopted job order, batch and
contract costing method. While mechanics, refrigeration/air-conditioning, and panel beaters adopted
a combination of job order and service costing method. Block moulders, and few numbers of shoe
makers and leather bag makers adopted process costing method and other combinations.
Tables 3 and 4 below indicate our finding with respect to material stocking and the reasons for
stocking or not stocking:

Table 3: Material Stoking

OPTION
Industry Yes No. Total
Furniture Makers - 15 15
Mechanics - 15 15
Welders - 15 15
Dress Makers 8 7 15
Block Moulders 5 10 15
Aluminium Fabrication 3 12 15
Refrigeration/Air-Conditioning - 15 15
Panel Beaters 2 13 15
Shoe Makers 9 6 15
Leather Bag Makers 9 6 15
Total 36 114 150
% 24 76 100

Source: Field work, 1998.

CAFRAD – African Training and Research Centre in Administration for Development. 6

Cost Accounting Practice in the Informal Sector of Nigeria

Table 4: Reasons for Material Stocking

OPTION
Industry Lack of Lack of Fear of
Storage Capital Theft Others Total
Furniture Makers 5 8 1 1 15
Mechanics 4 6 3 2 15
Welders 6 5 2 2 15
Dress Makers 1 8 5 1 15
Block Moulders 5 5 3 2 15
Glaziers 4 6 3 2 15
Refrigeration/Air 3 8 3 1 15
Conditioning
Panel Beaters 7 6 1 1 15
Shoe Makers 5 4 4 2 15
Leather Bag Makers 6 3 3 3 15
Total 46 59 28 11 150
% 30.67 39.3 18.67 11.33 100

Source: Field work, 1998.

Table 3 indicates that less than 25% of all artisans stock materials while Table 4 shows the various
reasons why they do not stock materials used in production. As much as 59 or 39.33 percent
confirmed the la ck of capital limited them from stocking materials.
In the area of labour, this study revealed that much of the artisans workforce largely depended on
apprenticeship. Over 50 percent of the labour requirements of the artisans is provided by
apprenticeship. This is shown in table 5 below.

Table 5: Distribution of workers

OPTION
Industry Apprentice Join-Men Employees CO- Total
s owners
Furniture Makers 10 2 3 - 15
Mechanics 11 3 1 - 15
Welders 9 3 2 - 15
Dress Makers 9 - 6 - 15
Block Moulders - 5 2 8 15
Glaziers 4 1 5 5 15
Refrigeration/Air 15 - - - 15
Conditioning
Panel Beaters 11 3 - 1 15
Shoe Makers 5 3 7 - 15
Leather Bag Makers 8 - 7 - 15
Total 82 20 23 15 150
Percentage 55 13 22 10 100

Source: Field work, 1998.

CAFRAD – African Training and Research Centre in Administration for Development. 7

Cost Accounting Practice in the Informal Sector of Nigeria

These apprentices were not paid, rather they were provided with lunch allowance. The allowance
was provided whenever they worked. On the techniques adopted by the artisans to control costs the
study found that there is no formal technique employed. Generally, purchases are made from
studying the market at the least possible price and for the right quality and quantity of materials.
Exercising firm control over workers/apprentices to minimise idle time and materials wastage, and
prudent check on the production incidental expenses also help to control costs.

DISCUSSION OF FINDINGS
There are a good number of control systems within an entity. But, cost accounting system is
relative, and monitors all other control systems. Cost accounting system is fundamental. It is the
foundation of the internal information system.
Thus, the cost accounting practice in the informal sector in Nigeria can be assessed under the
following major areas.

INVENTORY CONTROL SYSTEM

It is well observed in Nigeria that the informal business concerns lack specific inventory control
method. The rate of determination of store items naturally varies with materials concerned. The fact
however, remains that the longer an item is held in stock the more risk there is of deterioration. For
this singular reason, it is an elementary rule of good costing system that stock should be issued on
the basis on first-in first-out. The oldest stock is disposed off first.
Our investigation revealed that the informal business sector did not adhere to this principle;
probably, due to lack of professional knowledge. This principle though simple in theory, is difficult
to enforce in practice without adequate professional knowledge.
Investigations further reveal that when new consignments of goods arrive, the easiest thing the
artisans do is to put them on top of items already in stock.
Consequently, when issues are to be made, they simply take required quantities from the top of the
pile. The practice has resulted in some inventory items becoming obsolete hence, loss of
contribution.

MATERIAL STORAGE
It is observed that the role of cost accounting in the area of material management has been despised
by the artisans in Nigeria. Our investigation reveals that a vast amount of inventories are ruined in
every fiscal year because of bad storage. The storage of materials involves the physical custody as
well as the preservation. It is well observed that some entities expose items to hazardous climatic
conditions. This negative attitude has resulted in the wastage, rusting and evaporation.
On further investigation, we found out that the storage problems of some of the entities studied
were caused by wrong planning, misapplication of materials management principles, alteration of
material management procedures and lack of professional advise.
Caravans are used as stores by some artisans. These caravans are not well ventilated as they lack
windows and air -conditioners. In most cases there are no humidity and temperature control devices,
worst still, most of these caravans were found to have holes in them at the sides and also on top.
These holes allow pest and damp to enter. It is the requirement of a good cost accounting practice
that unauthorised entry or movement in the store should be disallowed. It is the contention of the
researchers that such “no entry” measures should also be applicable to pests as they can cause a
great deal of damage to inventories.

CAFRAD – African Training and Research Centre in Administration for Development. 8

Cost Accounting Practice in the Informal Sector of Nigeria

LOCATION SYSTEM
Improper system is at variant with good principle of cost accounting practice. The output is very
low and should be avoided as much as possible. Materials should be arranged well in the store so
that there is a specific location to enhance retrieval when necessary.
In our investigation, we found it difficult to define the location system in use in the sector. Some
artisans can neither be said to be operating random, fixed or a combination of fixed and random
location system.
To employ properly accepted system of stock location is a must if the information sector must
increase productivity. The importance of knowing quickly where to find every single item of stock
the moment it is required cannot be overstressed.

DECISION MAKING PROCESS

In the area of decision making, cost accounting if adequately and properly applied should provide
information regarding which products to produce among alternatives. Decision affecting pricing,
selling a product at separation point or processed further, delegating a product line and make or buy
decisions are all output of good cost accounting practice.
Contrary to the above, the artisans make business decisions by intuition, using a “trial and error”
approach. It is the practice among the artisans to always apply subjective means of making
decisions. They avoid quantitative and analytical means of decision making. All efforts are always
directed towards immediate maximisation of profit without considering the variables that bear on
such objective functions. They hardly achieve this objective because of the said fundamental
constraints.
It is worthy of note that this constraint if not properly checked could lead to a company’s ultimate
collapse. Some of the arguments of the artisans are that to produce reliable information for better
business judgement is costly in terms of money and time. They went further to assert that only big
corporations, governmental entities and other formal outfits can afford to take care of such
necessities.
However, keen observers of the sector know too well that these excuses are as frivolous as they are
flimsy. It is an indisputable fact that the objective of all business undertakings is to generate income
which is greater than the associated cost of production. But the fact remains that the effect of lack of
well articulated information and proper procedure for analysing information variables for effective
decision making can ruin the corporate existence of an entity. In other words, these constraints can
stop or reduce the normal business activities so that the anticipated income will either cease or
curtail because the earning capacity of the entity has been impaired.

SUMMARY AND CONCLUSIONS

The current state of cost accounting practice in the informal business in Nigeria is very poor and
this has caused obsolescence and deterioration of inventories. The situation is further worsened by
doubtful and inaccurate cost data which are not only erroneous but misleading following
misapplication of costing principles. In view of these facts, the following suggestions are advanced
with a view to reversing the situation at a minimal cost.
1. The entities should try to increase the number of qualified accountants and professional
managers currently with them. The output of these people is always rewarding.

2. It is important that inventories requiring similar conditions be stored together to concentrate the
efforts and resources required to protect them from the hazards of the environment.

CAFRAD – African Training and Research Centre in Administration for Development. 9

Cost Accounting Practice in the Informal Sector of Nigeria

3. Strict adherence to professional’s instructions especially in respect of inventories controls.

4. There is a need for timely and regular preparation of ad-hoc reports, schedule reports and of
course, exception reports in situations which do not conform with previously defined
parameters or norm.

5. At operational and tactical management level, there is a need for staff to undergo training in the
use of computer for a new orientation as to how to apply computer to decision making, for
enhanced productivity.

CAFRAD – African Training and Research Centre in Administration for Development. 10