Cost Reduction Methods And Its Effect On The Profitability Of A Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

Cost Reduction Methods And Its Effect On The Profitability Of A Manufacturing Company


Abstract


This study was carried out to investigate cost reduction methods and its effect on the profitability of a manufacturing company using Nigeria Breweries Plc as a study area. To achieve this objective, four research questions and two research hypotheses were formulated to guide the study. The data was collected from primary sources. The primary data were collected with the help of a well-structured questionnaire of two sections administered to the staff of Nigeria Breweries Plc. The collected data were analyzed with tables and simple percentages to analyze the research questions while Chi-square statistical tool was used to test research hypotheses. The study revealed that cost reduction methods impact on the profitability of manufacturing companies and high cost of production is a major determinant of low demand. The study concluded with some recommendations that cost reduction programme with outstanding benefit should be instituted or continued in every manufacturing firm. This will help in avoiding unnecessary cost. All staff, both junior and senior should be educated of its existence in the manufacturing firm.


Chapter One


Introduction

1.1 Background of the Study

Business of all sorts are established by their respective owners for the purpose of achieving some set of objectives. These objectives may vary in principles and in practice. Ogbor, J.O and Olannye, A.P (2011:46) defined objectives as the specific steps a firm needs to take in order to achieve its goals. It is also a detailed picture of a step you plan to take to in order to achieve a stated aim (The times 2012:1). It went further to state that a business objective must fulfill the following criteria for it be termed as such. These are:

It must specific, clear and easy to understand. It must be measurable/quantifiable It must achievable i.e possible to be attained. It must be realistic in nature. It must be time bound.

The financial objective focused on the achievement of sound financial performance years – in, year out. (Ogbor, J.O and Olannye, A.P, 2011: 47). Hostrand, D. (2009) argued that profitability is the primary goals of all business. This is the state or condition by which a firm yields financial gain or profit (Business Dictionary, 2012). The concept of profitability is used to ascribe an on going process in which a business entity yield better returns when compared with its investment. Peavley, R (2012) pointed out that every firm is most concerned with its profitability as it represents a favourable height any firm would want to attain in its operations. Keys indicator of profitability of a firm is the profitability ratio which shows the overall company’s efficiency and performance and makes use of the following instruments.

Gross profit margin Operating profit margin. Net profit margin. Cash margin. Return on investment. Return on equity. Cash returns on assets.

A careful analysis of the profitability of business firm would go a long way to determine the survival and sustenance of any business concern (Hofstrand, 2009). The all important concept of profitability is a function of sales (turnover) and cost of production (Pz cussons, 2012). Recent researches conducted by experts and research institutes on the profitability level of manufacturing companies have observed a declining state of companies profit-frost and Sullivan (2012) enumerated factors that can causes this ugly trend as:-

The presence of numerous competitors. Efficiency or inefficiency of the sales force of a company Ageing products and services Business environment peculiar to a company. Economic conditions of the country. Rising cost of operations.

It is pertinent to note here that of all the problems enumerated above, the cause of declining profitability of companies and which has its tell on these business entities. This is made manifest in the increasing cases of folding up of erstwhile vibrant companies. The institute of chartered accountants of Nigeria (2009:49) suggested that an effective all-inclusive cost reduction exercise would alleviate this corporate challenge. The research work shall beam its search on the reduction methods available to a manufacturing company, special emphases shall be paid to its effect on the profitability of such entity with a view to establishing a link between these two salient important concepts.


1.2 Statement of Problem

Donovan, (2012) observed that the need to adopt various cost reduction techniques and methods have become paramount owing to the quantum of challenges accruing from high cost of production. These problems are:

To determine high cost of production in manufacturing concerns. Ascertain the relationship between production cost and profitability. To adopt a control cost measure to reduce expenditure. To achieve organizational goal through the tool of various planning kits.

The above challenge vis-à-vis the accumulative effect on the profit level of a manufacturing company has thus prompted the research to look into the adoption of the various cost reduction methods as an antidote to the problem at hand.


1.3 Objective of Study

The business end of the study is to use the various cost reduction methods a tool for achieving the following targets:-

  1. To ascertain and hence reduce the cost of production of manufacturing companies.
  2. To establish the relationship between the cost of production and the profit level of business entities.
  3. To help develop a cost control limit that will help keep expenditure within acceptable limit. To serve as a planning decision making tool for organizational goal attainment.
  4. To this end, it is hope to be established that cost reduction methods would have favorable impact on the profit level firms.

1.4 Research Questions

Santiago, N. (2009:1) opined that a research question is an organizing element for the topic under review. It focuses one’s investigation into a narrow set of question to be answered in the course of the study. The research questions are sets of questions which the research hoped the study would give answers to (Asika, N. 1991:65). This project seeks to answer the following questions:-

  1. Can cost reduction methods impact on the profitability of manufacturing companies?
  2. Is high cost of production a major determinant of low demand?
  3. Can cost reduction improve market share of companies?
  4. Would cost of production impact on the storage cost of manufacturing companies?

1.5 Statement of Hypothesis

  1. H0: Cost reduction methods does not impact on the profitability of manufacturing companies.
    H1: Cost reduction methods impact on the profitability of manufacturing companies.
  2. H0: High cost of production is not a major determinant of low demand.
    H1: High cost of production is a major determinant of low demand.

1.6 Significance of the Study

This study on cost reduction methods and its effect on the profitability of a manufacturing company will generally educate the entire public on how cost reduction programme will be an effective tool employed by management of business organization in achieving profitability in an hyper inflated economy.

This study will also be of immense benefit to business organization especially Nigeria Breweries Plc to improve upon their cost reduction programme as a measure of reducing cost of production.

Moreover, this study will also serve as a source of information and reference material to future researchers who may wish to do research on related areas.

Finally, the finding of this study may also help in updating previous studies conducted in the area of cost reduction methods, thereby adding value to existing literature.


1.7 Scope and Limitation of the Study

This research study is limited to Nigeria Breweries Plc upon the subject of this study cost reduction methods and its effect on the profitability of a manufacturing company. In carrying out this research study, the researcher encountered very many constraints which include the following.

1. Time Factor:

The researcher has to carryout this project at the same time together with other social and economic engagement which he must have to attend to.

2. Financial Problem:

According to Anyanwu (1994) nothing is ever done without finance.

3. Scarcity of Materials:

Scarcity of materials on the topic delayed the early completion of this work. The collection of primary and secondary data was also a costly exercise.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Introduction

This chapter presents the summary, conclusion recommendations for further studies.


5.2 Summary of the Findings

This study was carried out to investigate cost reduction methods and its effect on the profitability of a manufacturing company using Nigeria Breweries Plc as a study area. To achieve this objective, four research questions and two research hypotheses were formulated to guide the study. A structured questionnaire was used as the major instruments to obtained data from 40 staff and management of Nigeria Breweries Plc. Out of this number, 40(100%) copies of questionnaire were appropriately completed and returned to the researcher for data analysis.
The data collected from the respondents were analyzed using simple percentage and tables to analyze the research questions while Chi-square statistical method was used to test the research hypotheses.

The findings revealed that;

  1. Cost reduction methods impact on the profitability of manufacturing companies.
  2. High cost of production is a major determinant of low demand.

5.3 Conclusion

Based on the findings of this study and subsequent recommendations, it is concluded that profitability and financial growth continue to be the major drive in the business community. Presently, Nigeria economy is passing through a very severe condition as prices of goods and services are heavily eroded. This has affected the performance of business operation. Manufacturing firms are now battling with high cost of production which is affecting their profit margin.

Therefore, there is a significant need to adopt and implement cost reduction strategies as soon as possible to avoid unnecessary cost and eliminate wastages which could prevent the business of running into excessive loss. By this the manufacturing firm will achieve its basic objective of increased profitability and growth.


5.4 Recommendations

Based on the findings of this study, the research put forward the following recommendations;

  1. Cost reduction programme with outstanding benefit should be instituted or continued in every manufacturing firm. This will help in avoiding unnecessary cost. All staff, both junior and senior should be educated of its existence in the manufacturing firm.
  2. The manufacturing firms should consistently review the techniques and methods of cost reduction approved by management in line with rate of inflation in the economy.
  3. Manufacturing firms should introduce management by objective (MBO) in their organization. This will inspire and motivate workers to work maximally in the company interest.
  4. Manufacturing firms should ensure that methods of cost reduction adopted should not over or under state its gross profits figure and the reported profit in the company financial statements.

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