IMPACT OF COST CONTROL AND COST REDUCTION ON PROFITABILITY OF MANUFACTURING COMPANY. (CASE STUDY OF BLACKWORTH CONSTRUCTION COMPANY, KWARA STATE).

CHAPTER ONE

INTRODUCTION

1.1.          BACKGROUND TO THE STUDY

A business objective is the starting point for any business organization to thrive and it provides direction for action. It is also a way of measuring the effectiveness or otherwise of the actions taken by the management of the organization. The main goal or objective of any business organization is to make and maximize profit while other secondary objectives include going concern, growth, corporate social responsibility, benefits to employees and so on. Though other objectives are also considered very important as listed above, but profit maximization is usually the ultimate because it maximizes the shareholders wealth which is the ultimate aim of investing in a business. People will naturally prefer to invest in a highly profitable business. Therefore, in the long run only the profit maximizers survive in the business environment.

However, for adequate profit to be recorded from a business there is a need for adequate control of cost. Robert (2007) stated that a company with adequate cost structure possesses the higher chance of attaining its profit target.

Prices of goods, raw materials and services are gradually increasing day by day, and due to the fact that the sole aim of a businessman, producer or manufacturer is to make profit they end up making use of low quality materials for production so as to reduce cost of production and maximize profit. Moreover, with the increase of competitors around, most of the producers have thought it wise to manufacture or package a quality product and also enhance their profit level. Cost control/reduction and profitability is the mainstay of every business entity and therefore represents the bottom line for every company. For a firm to be profitable, a clear and thorough understanding of all the factors that drive profit, as well as cost is very important (Adeleke, 2014).

Cost control is an important and has always been an important issue but perhaps most important in today’s unpredictable market with few exceptions, at no other time in history has the business market been more dynamic. Unlike the large scale enterprises, the small and medium scale enterprises (SMES) have been starve by financial needs, poor implementation and monitoring of projects, time and cost overrun, nonpayment of loans and harsh economic conditions. (Adam, 2005). Moreover, one of the most important traits for business success in a recession economy in especially Nigeria is that more and more manufacturing companies had been chased out of market and are thus using cost control and cost reduction as a competitive weapon.

However, a business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction both are the activities necessary for ensuring that these objectives are fulfilled. With the current Economy situation of a developing economy such as Nigeria, there is now a cut throat competition from various business concerns of the countries. As a result there is now a race to secure a place for survival. This has increased the importance of Cost Control and Cost Reduction. Hence it is required to study the different tools and techniques used for the Cost Control and Cost Reduction. For the same we need to start with understanding deeply the concept of cost. Once we understand the meaning of cost, its controllability, main areas where cost arises, then we can think of how to control or reduce the cost. We can classify the cost according to their nature, behavior then we can easily know the cost which can be controlled or reduced.

One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash are not too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment. Many construction companies use outside assessments to analyse their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day to day basis, but professional analysts can bring a broader scope to operations resulting in improved cost control strategies.

This elevated the interest of the researcher to bring to light of how this goal can be achieved through intensive study of the role of cost control and cost reduction on the profitability of manufacturing company in Nigeria.

1.2. STATEMENT OF PROBLEM

In recent years, the cost of products manufactured in Nigeria has been very expensive beyond the reach of common Nigerians. This cost challenges has made many products manufactured in the country unpatronized by the consumers, and as a result of that expires in the hands of the sellers. There is also a problem of poor inventory management which leads to overstocking thereby tying down the company’s working capital. Another problem facing some or most of the manufacturing firm is the installation of improper plan to reduce cost of production so as to maximize profit, i.e. ( making use of low quality  raw material).

The sole aim of any business organisation is to make profit and most business owners believe that the best way to make profit is to increase sales and this brings up another conundrum. In order to increase sales, there must be a corresponding increase in cost because of the increased amount of work involved. These increased costs are what need to be curtailed.

Also, the exorbitant cost of running business in Nigeria has necessitated the need to focus on cost control and cost reduction as a means of achieving both the primary and secondary objectives of being in business, which include maximisation of profit and shareholder value. Up till now, many companies do not see cost management as a serious issue. No wonder why they frequently complain of low returns to capital employed. The inability to control or reduce cost incurred and attendant effect on profitability has forced some Nigerian firms to relocate their businesses to the neighboring countries, where they assume cost of running business will be relatively cheaper compared to what is happening in Nigeria.

Although the economic crisis has created enormous challenge for companies, as the economic times demanded that companies make the right management decisions if they were to survive, opportunities were also emerging companies were under increasing pressure to scrutinize all parts of the business processes to identified new areas of efficiency. Strategy cost management therefore became a tool to look unto as a competitive tool for business survival in the recessionary times.

Lastly, Manufacturing firms in Nigeria now operate within a turbulent business environment which has been characterized by high rate of inflation, intense competition by capacity utilization, depreciation and depreciation value of Naira, etc. As a result of the afore mentioned, many firms struggle to maintain satisfactory earnings in a situation where costs are rising but price increases are becoming more and more difficult to achieve, It therefore become a truism to state that three exist a problem in an organization where the cost method in operation is either not relevant or is not effectively applied to.  Business organization is facing some setback in profit generation as a result of tributary allocation of cost to products and cost centre. This has been rise to:

• High product cost
• high product price
• low turnover rate

Cost control and cost reduction method as usually adopted by an organization.

It is against this backdrop that this study seeks to evaluate the effect of cost control and cost reduction on profitability of manufacturing company.

1.3. OBJECTIVES OF THE STUDY

The general objective of the study is to appraise the impact of cost control and cost reduction on profitability of manufacturing company in Nigeria.

Other specific objectives are as follows;

1. Understand the basic concept of Cost, Cost Control, and Cost Reduction.
2. To determine the relationship between effective cost reduction measures and profit performance of Nigerian manufacturing firms.
3. Identify the role of costing as an instrument for expressing company’s policy or programme.
4. To ascertain the accounting systems which are designed to control costs.
5. Appraise various cost control techniques and its impact on Nigeria manufacturing firm.
6. Investigate whether cost control and reduction can be used as competitive strategy for survival tools in Nigeria business industry.
7. Ascertain the effect of adjusting the cost of an organization on the profitability of manufacturing company.

1.4. RESEARCH QUESTION

For emphasis on the study, the following research question can be used to throw more light on the study;

1. What are the basic concept of Cost, Cost Control, and Cost Reduction?
2. Are there any relationship between effective cost reduction measures and profit performance of Nigerian manufacturing firms?
3. What are the roles of costing as an instrument for expressing company’s policy or programme?
4. What are the various accounting systems designed to control and reduce costs?
5. What are the various cost control techniques and its impact on Nigeria manufacturing firm.
6. To what extent do cost control and reduction could be used as competitive strategy for survival tools in Nigeria business industry?
7. What effect does the adjustment in the cost of an organization exert on the profitability of manufacturing company?

1.5. STATEMENT OF HYPOTHESIS

The following hypothesis was formulated for this research work.

HYPOTHESIS 1

H0: There is no significant impact of effective cost control/reduction measures on the growth and profitability of Nigerian manufacturing firms.

HYPOTHESIS TWO

H0:  Inefficient application of cost control and cost reduction techniques leads to a decline in the profit level of an organization, when other factors are constant.

1.6. SIGNIFICANCE OF THE STUDY

It remains an uncontroversial fact that anything done for a specific purpose has it importance.  This could be advantageous or disadvantageous.  This significance of this research lies in the fact that the author is now better armed to face such challenges squarely in future, should he find himself in an establishment that needs his/her services.

The research study will add to the pool of knowledge and help to instill cost consciousness amongst manufacturing firms in Nigeria and identify the cost control systems and cost minimization tools that suit the organization such that they will no longer claim ignorance or be left in the dark.

Furthermore, The result of this research work is expected to widen the view held by potential managers and other corporate bodies, who have been in one way or the other perhaps, been have parochial view of the needs of cost control. It will be of great benefit to manufacturing and processing industry(s). 

Relevant industries will be exposed to determine the increased level of demand, which invariably increase profitability.  Tax authorities and auditors are not left out of the benefits derivable from cost control and cost reduction. Increase revenue will subsequently boost infrastructures facilities.

It is believed that this paper will contribute to the body of existing knowledge and as well make up for the paucity of scholarly paper in Nigeria on cost control /reduction and firm profit performance. Also, it will be of assistance to the company management in their cost reduction activities as well as management accounting students in their future research study.

1.7. SCOPE AND LIMITATION OF THE STUDY

These research will reveal the essences of cost control and cost reduction in manufacturing firm in Kwara State, Nigeria,   the cost structure of the sector, cost control measures adopted to minimize waste of resources and invariably the major procedures embarked to ensure that actual results are in line with the set standard; so that waste are measured and appropriate action taken to correct the activity. A case study of Visleri Table Water, Kwara State.

Also, this research work consists of five fine chapter.  Chapter one is an introductory chapter, chapter two give an overview of the topic and chapter three is the research design and methodology while four is for data analysis and lastly is the chapter five where the author give his finding recommendation and conclusion.

In the process of carrying out this research work, the most nagging problem facing the study is how to obtain reference materials. The time to carry out the research is short and insufficient, since it is done alongside with some other courses to contend with so as to present a good result. There are also difficulties associated with personnel’s accepting to give vital information which will be of help to the researcher.

1.8. DEFINITION OF TERMS

1. Cost: This refers to expenditure incurred over a period of time to produce a product or a service.

2. Cost Control: This involves all efforts to keep the actual cost incurred in line with the pre-determined cost, and by the comparison of actual cost with their predetermined costs to revel unreasonable cost in order that step may be taken to identify and if possible remove the responsible factor.

3. Cost Reduction: An attempt to bring costs down from a previously accepted level. It is also a systematic effort to improve profit margins by eliminating all forms of waste and unnecessary expense without impairing the generation of revenues.

4. Just-In-Time (JIT): A manufacturing system that reduces the time that products spend in the production process by eliminating waste.

5. Cost Unit: A quantitative unit of product or service inrealtion to which cost are ascertain.

6. Profit maximization: A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, price of goods and output level as a way of reaching its profit goal.

7. Management: this is defined as the process of dealing with or controlling things or people. It is the responsibility for control of a company or similar organization.

8. Impact: This is the degree to which a particular management policy and or measures yield desire result.

9. Budgetary Control: Is part of overall system of responsibility accounting. Establishment of budgets for each area of functional responsibilities so that the performance required in order that the objectives of the business as a whole may be achieved. That is regular comparison of actual with budgeted results.

10. Value Analysis: A cost reduction technique which attempts to reduce the manufacturing cost of a product with reducing it’s quality performance or value to the customer.