African Training and Research
Centre in Administration for
Development
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Centre Africain de Formation
et de Recherche
Administratives pour le
Développement
Cost accounting practice in the informal
Sector of Nigeria
(A survey of eastern business zone)
By
Lawyer c. Obara
And
Ndukwe a. Ukpai
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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.
______________________________________________________________________
African Administrative Studies, No. 56, p. ... to ...
Cost Accounting Practice in the Informal Sector of Nigeria
Regrettably enough, it is envisaged that this enigmatic and ugly situation is not going to be
short-lived in spite of its attendant consequences. It therefore requires immediate and concerted
efforts to shape a new directional focus that will ensure an efficient and effective cost accounting
practice in Nigeria’s informal business sector.
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
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
2
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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. 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 worldwide. 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”.
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
3
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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
(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.
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
4
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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 failures 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)
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
5
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
6) Refrigeration and Air-conditioning maintenance
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
Industry
Furniture Makers
Mechanics
Welders
Dress Makers
Block Moulders
Aluminium Fabrication/Glaziers
Refrigeration/Air-Conditioning
Panel Beaters
Shoe Makers
Leather Bag Makers
Total
%
Yes
5
2
3
3
13
9
OPTION
No
15
15
15
10
15
13
15
15
12
12
137
91
Total
15
15
15
15
15
15
15
15
15
15
150
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.
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
6
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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:
Table 2: Cost Accounting Method(s)
Industry
Furniture Makers
Mechanics
Welders
Dress Makers
Block Moulders
Aluminum Fabrication
Refrigeration/Air
Conditioning
Panel Beaters
Shoe Makers
Leather Bag Makers
Total
%
Job
Costing
8
10
7
9
8
10
Batch
Costing
3
3
4
2
3
-
12
5
5
74
49.33
9
8
32
21.33
OPTION
Contract
Process
Costing
Costing
4
5
2
1
12
4
16
10.67
1
2
15
10
Services
Costing
5
5
Total
3
13
8.67
15
15
15
150
100
15
15
15
15
15
15
15
Source: Fieldwork, 1998.
Furniture makers, welders, dressmakers, 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 shoemakers 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
Industry
Yes
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
OPTION
No.
Total
7
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
Furniture Makers
Mechanics
Welders
Dress Makers
8
15
15
15
7
15
15
15
15
Block Moulders
Aluminium Fabrication
Refrigeration/Air-Conditioning
Panel Beaters
Shoe Makers
Leather Bag Makers
Total
%
5
3
2
9
9
36
24
10
12
15
13
6
6
114
76
15
15
15
15
15
15
150
100
Source: Fieldwork, 1998.
Table 4: Reasons for Material Stocking
Industry
Furniture Makers
Mechanics
Welders
Dress Makers
Block Moulders
Glaziers
Refrigeration/Air
Conditioning
Panel Beaters
Shoe Makers
Leather Bag Makers
Total
%
Lack of
Storage
5
4
6
1
5
4
3
Lack of
Capital
8
6
5
8
5
6
8
OPTION
Fear of
Theft
1
3
2
5
3
3
3
7
5
6
46
30.67
6
4
3
59
39.3
1
4
3
28
18.67
Others
1
2
2
1
2
2
1
Total
15
15
15
15
15
15
15
1
2
3
11
11.33
15
15
15
150
100
Source: Fieldwork, 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 artisan’s 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
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
8
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
Industry
Furniture Makers
Mechanics
Welders
Dress Makers
Block Moulders
Glaziers
Refrigeration/Air
Conditioning
Panel Beaters
Shoe Makers
Leather Bag Makers
Total
Percentage
Apprentice
s
10
11
9
9
4
15
Join-Men
OPTION
Employees
2
3
3
5
1
-
11
5
8
82
55
3
3
20
13
Total
3
1
2
6
2
5
-
COowners
8
5
-
7
7
23
22
1
15
10
15
15
15
150
100
15
15
15
15
15
15
15
Source: Fieldwork, 1998.
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;
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
9
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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 advice.
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.
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,
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
10
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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 also 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.
2.
3.
4.
5.
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.
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.
Strict adherence to professional’s instructions especially in respect of inventories controls.
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.
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.
Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
11
Cost accounting practice in the informal sector of Nigeria
(a survey of eastern business zone)
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Dr. Lawyer C. OBARA and Dr . Ndukwe A.. UKPAI
Lecturer- Departement of Accountancy, Faculty of Management Sciences
12