IMPACT OF MARGINAL COSTING ON FINANCIAL PERFORMANCE OF

MANUFACTURING FIRMS IN NAIROBI COUNTY

(CASE STUDY OF COCA-COLA MANUFACTURING COMPANY)

EVANS KIPNGETICH

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULLFILLMENT OF

THE REQUIREMENT OF BACHELOR OF COMMERCE OF THE
UNIVERSITY OF THE UNIVERSITY OF EMBU

APRIL 2024
 DECLARATION PAGE
This research proposal is my original work and has not been presented
elsewhere for degree or any other award.

SIGNATURE……………………DATE……………………………………
EVANS KIPNGETICH
D190/18910/2020
DEPARTMENT OF BUSINESS STUDIES.

This proposal has been submitted with my approval as the university

supervisor.
SIGNATURE……………………………DATE………………………………….
DR. JESSE KINYUA
DEPARTMENT OF BUSINESS STUDIES
 DEDICATION

This research study is dedicated to my father Ezekiel Korir and my

mother Esther Cherono Korir and the entire Ezekiel family.
 ACKNOWLEDGEMENT

I am greatly indebted to the almighty God for giving me knowledge,

good wisdom and good health. I am also grateful to my supervisor Dr.
Jesse Kinyua for the advice and the time accorded throughout the
duration of the research proposal. Thanks to all the lecturers at the
school of business and economics, University of Embu.
I also owe a lot of thanks to my parents Ezekiel Korir and Esther
Cherono Korir. Special thanks to my brothers and sisters. Thank you for
the encouragement and emotional support throughout my study.
Nonetheless, I take responsibility for the challenges and shortcomings of
the study.
DEFINITION OF TERMS

ABBREVIATION AND ACRONYMS

CIMA CERTIFIED INSTITUDE OF MANAGEMENT ACCOUNTING

ABSTRACT
CHAPTER ONE
This chapter introduces researcher to the background of the study,
statement of the problem, objectives, research questions, hypothesis,
scope of the study, justification of the study and limitations of the
study.
1.1 BACKGROUND OF THE STUDY
Marginal costing is one of the tools of management accounting that
helps management in making useful decisions. It provides management
with information regarding to the behavior of cost and the incidence of
such costs on the profitability of manufacturing company.
Marginal costing is defined as the technique of presenting cost
information whereby only variable costs are considered as the only
manufacturing costs. Marginal costing is not a separate costing as it is
the only technique used by accountants to aid management decision.
According to certified institute of management accounting (CIMA)
terminology” define marginal costing as the ascertainment of marginal
costs and the effect on profit of changes in volume or type of output by
differentiating between fixed costs and variable cost.
In this technique of costing only variable costs are charged to
operation, processes or products leaving all indirect costs to be written
off against profits in the period in which they arise”. Thus marginal
costing is the accounting system in which variable costs is charged to
cost units and fixed costs of the period are written off in full against the
aggregate contribution. It special value is in decision making.
It is a technique of applying the existing methods in a manner in order
to bring out the relationship between profit and volume of output.

1.1.1 FINANCIAL PERFORMANCE

Businesses may determine if their initiatives and procedures have been
successful met by conducting an assessment and review of company
financial performance. Efficient businesses not only gather and evaluate
financial performance data also use the data to search for methods to
make some improvements to the business, all in the name of developing
the most effective strategies for achieving the firm's financial
objectives. According to Alabdullah (2019), the primary focus of every
business should be on increasing its profits, hence this metric receives a
great deal of attention in financial performance evaluations. In business,
profitability is measured by how well money generated from operations
exceeds costs expended. Traditionally, net income has been and
continues to be the only metric of profitability. Profitability is the single
most important metric to both investors and creditors when evaluating a
company's success. As a result, before putting money into a company,
most people consider the company's present and projected profitability.
Though the major goal of any commercial operation is now to maximize
the value of the shareholders, contemporary financial management
literature claims that the current primary purpose of any manufacturing
is to provide a high degree of profitability to reassure investors and
lenders about the company's performance (Nzewi, 2015). Among the
many factors that might affect marginal cost to boost financial
performance include
Profitability: Profitable companies are believed to pay bigger dividends,
implying a positive association of profitability in marginal costing. This
relationship agrees with the resource base theory (John & Williams,
1985), which states that highly profitable companies are more inclined
their production cost to their shareholders in order to communicate
their superior financial performance. When their counterpart firms with
weaker financial positions are unable to match such levels, this serves as
a signal of a company’s performance to the market.
Liquidity: Liquidity assesses a company's capacity to pay its short-term
debts using its liquid assets. Companies with strong liquidity makes
good provision for their direct labor than those with weak liquidity
(Gichaaga 2014). To mitigate the consequences of the agency problem,
Jensen (1986) proposed that companies should make good provision for
the smooth running of the firm to limit the amount of funds available
for managers to enrich themselves. As a result, marginal cost serves as
a cost-cutting tool for the agency.
Growth Rate: According to Mustafa and Miston, (2017), manufacturing
firm with a lot of investment prospects and the ability to grow their
business will keep more earnings to reinvest because such source of
funding has lower costs than external funding. Baker and Powell (2012)
agreed that a company's motivation to reduce their cost is determined
by its investment growth potential. This shows that a company's ability
to reduce their cost is influenced by its growth potential, as investment
opportunities drain cash resources may be through their external
responsibility or through dividends payment
Firm’s Size: According to Baker and Mustafa and Miston, (2017),
marginal cost by a company is directly proportionate to its size. This
implies that the such costs to shareholders is a function of the
company's size. The study claimed that because of the significant
processing costs smaller firms are likely to incur when raising capital
Ali-Momoh, B.O., Shaka, A., Olagbuyiro, O.E., Olowokere, T.S. &
Ayodele, F. 418 KIU Interdisciplinary Journal of Humanities and Social
Sciences, 3(1), 384-404 externally, they can resort to pay minimal cost.
As a result, this study regards firm’s size as a crucial firm-specific
attribute that managers frequently consider in determining the level of
their usage and expenses in making decisions.
Financial Leverage: High-levered companies frequently pay no or
modest dividends because they prefer to use their internal resources to
satisfy their obligations and minimize external borrowing costs rather
than providing cash to shareholders ((Oguntodu &Taiwo 2018).
According to Kirkulak and Kurt (2010), the quantity of debt has no
effect on dividend behavior, but a higher level of debt will eventually
increase the volume of dividend decreases.
Business risk: According to Pradhan et al (2018), companies with
significant business risk are more likely to go bankrupt, hence they
could not reduce their cost of production during these times. External
finance is the most expensive type of financing, according to pecking
order theory, hence, companies reduced dividend distribution instead
to enhance the smooth running from the production process to the final
consumers
Tangibility of Assets: According to Soltani et al, (2014), firms operating
in developing nations with more physical assets (and consequently less
short-term assets) pay smaller dividends. The study explains this by
claiming that having a higher percentage of long-term tangible assets
reduces the proportion of short-term assets that may be used as
collateral for short-term loans, lowering the borrowing capacity of
companies whose primary source of debt is short-term bank financing.
This will require such companies to employ more internally generated
capital, reducing their excess cost and expenses that is not necessary.

1.2 STATEMENT OF THE PROBLEM

The purpose of the study, " Impact of marginal costing on financial
performance of manufacturing firms in Nairobi county, “With a goal to
determining the following:
 The degree to which a standard marginal costing promotes or
inhibits a financial performance reports of Coca-Cola bottling
company.
 How closely Coca-Cola manufacturing firm adhere to legal
requirements in preparing financial reports.
  With the variety of regulators, there is uniformity and conflict of
interest in financial reporting regulations of manufacturing
company’s financial performance.
 Due to the foregoing, the researcher must look into impact of
marginal costing on financial performance of manufacturing firms,
as well as the extent to which the company(s) has either complied
with or disobeyed the financial reporting regulations.

1.3 OBJECTIVES
This study’s goals are to analyze the management and marginal costing
reports of chosen manufacturing firm. Critically and delve into the
foundations of their creation and presentation in order to ascertain:
 The suitability of the foundation and the principle that directs its
creation.
 How well the financial reports adhere to the generally accepted
management accounting reports and standards of a manufacturing
company.
 How marginal costing financial reports affects financial
performance of manufacturing firms.
  How business manufacturing firm’s analyses and reconcile
marginal cost statements
 Assess the needs of various users of the management costing
information.
 To provide ideas and suggestions based on my results.

1.4 RESEARCH QUESTIONS

It is important to evaluate the following questions to ascertain the
impact of marginal costing on financial performance of manufacturing
firms of business organizations:
 Does the suitability of the foundation and the principle that directs
its creation affects financial performance of manufacturing firms?
 Do the published financial reports adhere to the generally
accepted management accounting reports and standards of a
manufacturing company?
 Do published marginal costing financial reports affect financial
performance of manufacturing firms?
 Do business manufacturing firm’s analyses and reconcile marginal
cost statements?
  Do manufacturing firms assess the needs of various users of the
management costing information?
This study will provide answers to the questions addressed. It is my
opinion that the results of these findings will significantly aid scholars in
this field of study and improve users' comprehension of the format of
published reports and accounts.
The following are the advantages that the different groups of the
published financial report can gain from this study:
1. The Prospective Investors: These are individuals and organizations
that are investing their available funds in the purchase of the company's
shares. These individuals will gain something from this study because
the findings still give them the tools they need to assess how a
corporation's financial report affects them.
2. The General Public: This group will gain from this report by
understanding that the corporate entity exists for them, not against
them, and as such must fulfill all of its obligations.
3. The Regulators of Financial Accounting Report: This group consists of
the company and the institution of Certified Public Accountants of Kenya
(ICPAK). They can unify and standardize their activities with the aid of
the study.
4. The Group of Employees Including Current: Current and former
employees.
5. The government, including tax authority’s departments, who are
interested in financial reports of companies: The outcome of this effort
will be extremely helpful to each of these user groups in advancing their
interests.
1.5 SIGNIFICANCE OF THE STUDY
The following groups would greatly benefit from this work:
 Economic scholars,
 Financial experts,
 Students.
 Management and shareholders
 Investors
This work's main contributions are:
 Financial statements are used by business management as a tool
for assessing performance and determining whether they are truly
trusted.
 To a deeper investigation of financial statement usage.
  To other researchers or academics who might want to conduct
additional research on the topic or other connected subjects.
 It will reveal how manufacturing firms use financial statements to
make decisions.

1.6 SCOPE OF THE STUDY

Marginal costing financial statements are group of significant reports
that summarizes an organizations financial performance, financial
position, statement of changes in equity and cash flow. In this case the
researcher will study the obligation of the business and how they
provide financial information about the economic resources in order to
achieve better results.