Absorption Costing and Its Effect on Financial Performance of Manufacturing Companies in Nigeria

Abstract

This research was undertaken to investigate the effect absorption costing had on the financial status of manufacturing firms in Nigeria. In particular, the study determined how factors such as Total Manufacturing Cost per Unit (TMCU), Fixed Manufacturing Overhead Absorbed (FMOA), and Inventory Valuation Methods work to impact the profitability of listed manufacturing companies in Nigeria. This research took into consideration of period covering 2009-2024, utilizing quarterly data retrieved from the financial statements of selected firms listed on the Nigerian Stock Exchange (NSE). Secondary data were gotten from the annual financial reports of the companies and other industry publications. The study undertook an Autoregressive Distributed Lag estimation technique to study the short-run and long-run relationships between the variables.

Results showed that Total Manufacturing Cost per Unit positively influences financial performance in short run with a coefficient of 0.24 (p < 0.05) and 0.35 (p < 0.01) in the long run. Conversely, Fixed Manufacturing Overhead Absorbed also exhibited a positive short-run effect of 0.18 (p < 0.05), which increased to 0.27 (p < 0.01) in times where financial effects are considered. Inventory Valuation Method declined with a negative and statistically significant influence, showing a coefficient of -0.12 with a statistical significance of less than 0.01 in the long run. These results indicate that proper cost management strategies particularly relating to manufacturing cost per unit and overhead absorption are essential to improve the financial performance of manufacturing firms in Nigeria. The study therefore suggests that companies should gear their efforts towards improving cost structure and efficient inventory valuation methods to enhance profitability and sustain themselves in the long term.