Cost Reduction Methods And Its Effect On The Profitability Of A Manufacturing Company (A Case Study Of Indomie Company, Choba, Port Harcourt)

Cost Reduction Methods And Its Effect On The Profitability Of A Manufacturing Company (A Case Study Of Indomie Company, Choba, Port Harcourt)

Abstract

The study investigated cost reduction methods and its effect on the profitability of a manufacturing company with particular emphasis on Indomie Company, Choba, Port Harcourt. Specifically, the study examined how changes in material cost, changes in labour cost and changes in administrative overhead as variables for cost reduction method influences the profitability of a manufacturing company. The research design adopted for this study is ex post facto research design. Data collated were analyzed using descriptive statistics such as correlation and regression estimation. The findings reveal that cost reduction methods has significant effect on the profitability of a manufacturing companies. Therefore, the study recommends that company policy makers and transaction advisors should be keen on making cost management policies to be applied since they greatly impact on financial performance of the company; and company policies regarding to financial performance of companies should incorporate various cost management strategies since they greatly impact financial performance.

Table of Content

• Title Page
• Certification
• Dedication
• Acknowledgement
• Table of Content
• List of Tables
• Abstract

Chapter One:

Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problem
• 1.3 Objective of the Study
• 1.4 Research Questions
• 1.5 Research Hypothesis
• 1.6 Significance of the Study
• 1.7 Scope of the Study
• 1.8 Limitation of the Study
• 1.9 Definition of Terms
• 1.10 Organisations of the Study

Chapter Two:

Review of Literature

• 2.1 Conceptual Framework
• 2.2 Theoretical Framework
• 2.3 Empirical Review

Chapter Three:

Research Methodology

• 3.1 Introduction
• 3.2 Research Design
• 3.3 Sources of Data
• 3.4 Model Specification
• 3.5 Method of Data Analysis

Chapter Four:

Data Presentation and Analysis

• 4.1 Introduction
• 4.2 Data Analysis
• 4.3 Discussion of Findings

Chapter Five:

Summary, Conclusion and Recommendation

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendation
• References

Chapter One

Introduction

1.1 Background to the Study

The growth of any company is largely determined by how well it can manage its costs. This is partly because to be able to maximize profit, cost must be reduced to the bearest minimum. Cost reduction has become a vital tool for companies to constantly stay ahead of the increased competition in the business environment (Alireza & Mahdi, 2012). Indeed, even organizations that are gainful can profit by implementing cost-lessening techniques to make a considerably higher overall revenue on its items or administrations. According to Ogunnaike (2010), the effective and efficient management of cost is not only necessary to meet the profit objective of the company but also the going concern status of the entity. To record growth in terms of increase in profit of an organization, cost reduction mechanism should be put in place.

Chartered Institute of Management Accountants (CIMA), London defined cost reduction as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without damaging the ability of the product to serve the purpose for which it was intended. According to Gaurav,Jain,Kapoor and Nateriya (2013), cost reduction is “the way toward searching for, finding and expelling baseless costs from a business to build the benefit without negatively affecting item quality”. The concept of continuously searching for new ways and avenue of reducing costs needs to be constantly promoted at all levels of an enterprise, which signifies that the enterprise has a strategic approach to this issue (Figar& Ivanoic, 2015).

Cost reduction strategies such as value engineering and value analysis, tight budgetary control (budget discipline), target costing and life cycle costing can be adopted by manufacturing companies to reduce the material cost, labor cost and productivity cost attributed to manufacturing. This research is therefore concerned with the nexus between cost reduction strategies and profitability of manufacturing companies in Nigeria.

1.2 Statement of the Problem

Any corporate organization’s only goal is to increase its capacity for growth by generating income and reducing costs. The majority of business owners think that growing sales is the best strategy for turning a profit, but this creates a new issue. Nigeria’s manufacturing sector currently faces a number of issues that require urgent attention. The majority of imported goods, which are less expensive than those made in Nigeria, have posed a significant threat to the country’s ability to sell goods (Adigbole, Adebayo, & Osemene, 2020). The study by Nwatu, et al. (2020) confirmed that manufacturing firms have witnessed unexpectedly high operating costs with the attendant reduction in profitability as a result of high operating costs associated with the maintenance and administration of a day to day business activities. Adeleke (2014) submitted that quite a several manufacturing companies in Nigeria have ceased to operate, whereas the bigger companies have acquired many other companies and at best, merged with other bigger companies. Some have relocated their operational base to neighboring countries (Abdul & Isiaka, 2015).

However, a review of extant literature revealed so many inconsistence results on the impact of cost reduction on the profitability of firms within and outside the Nigerian economy. In some studies, the periods covered are shorter compared to the current study while some studies were conducted in a different country with either a larger or smaller economy compared to that of Nigeria thereby making it impossible to generalize the findings of such studies from those environments because of the differences that exist in terms of political, economic and cultural. However, this study intends to fill these gaps. It is premised on the aforementioned problem that the main objective of the study is to investigate cost reduction methods and its effect on the profitability of a manufacturing company with particular emphasis on Indomie Company, Choba, Port Harcourt.

1.3 Objectives of the Study

The main study objective is to examine cost reduction methods and its effect on the profitability of a manufacturing company. The study will specifically find out how changes in material cost, changes in labour cost and changes in administrative overhead as variables for cost reduction method influences the profitability of a manufacturing company.

1.4 Research Questions

The study will be guided by the following questions;

1. What is the effect of changes in material cost as variables for cost reduction method on the profitability of a manufacturing company?
2. What is the effect of changes in labour cost as variables for cost reduction method on the profitability of a manufacturing company?
3. What is the effect of changes in administrative overhead as variables for cost reduction method on the profitability of a manufacturing company?

1.5. Research Hypotheses

• Ho1: There is no significant and positive effect of material cost as variables for cost reduction method on the profitability of a manufacturing company.
• Ho2: There is no significant and positive effect of labour cost as variables for cost reduction method on the profitability of a manufacturing company.
• Ho3: There is no significant and positive effect of administrative overhead as variables for cost reduction method on the profitability of a manufacturing company.

1.6 Significance of the Study

The study will be of great importance to the manufacturing industry as it provides information on a simplified three dimension approach to cost reduction strategies and the financial impact the strategies have on manufacturing companies. Manufacturing companies will be in a position to boost their financial performance by using the findings of the research.

Theoretical contribution of this study is providing knowledge for management accounting literature about cost reduction methods.

1.7 Scope of the Study

The general focus of this study boarders on the cost reduction methods and its effect on the profitability of a manufacturing company with particular emphasis on Indomie Company, Choba, Port Harcourt. The study will cover a period of 5years from 2012-2016.

1.8. Limitations of the Study

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries in Nigeria, therefore, this study was limited to a selected manufacturing companies.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. Thus, it was difficult for the researcher to meet up some of the appointment with respondents.

1.9 Definition of Terms

Cost Management

Cost management often refers to cost cutting and it’s commonly approached that firm managers use to respond to the decreasing sustainable profitability.

Cost Control

Cost control is the process of maintaining expenses at the level intended for them to be at or at the level anticipated for them utilizing robust budgeting and budgetary management systems

Cost Reduction

Cost reduction is a planned approach to reduce expenditure. It is a continuous process of examining critically all elements of cost and each aspect of the business with a view to improving business efficiency.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

• Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
• Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
• Chapter three deals on the research design and methodology adopted in the study.
• Chapter four concentrate on the data collection and analysis and presentation of finding.
• Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusion and Policy Implications

5.1 Introduction

This chapter presents the summary, conclusions and recommendations of the study. These are presented in line with the objectives and findings of the study.

5.2 Summary of the Study

The study was undertaken to examine cost reduction methods and its effect on the profitability of a manufacturing company with particular emphasis on Indomie Company, Choba, Port Harcourt. This study used secondary data in examining the association between cost reduction methods variables and profitability of a manufacturing company. The research design adopted for this study is ex post facto research design.

5.3 Conclusion

This study was carried out mainly to investigate whether there exist a relationship between cost reduction methods variables and profitability of a manufacturing company for the period of 2012-2016. The study relied on secondary data extracted from the annual reports of the selected company. Changes in direct material costs, changes in labour costs and changes in administrative overheads were considered as independent variables while profitability of a manufacturing company was taken as dependent variable. The result indicates a positive significant relationship between changes in material costs, changes in total assets and profitability of a manufacturing company. However, it was discovered that there is no significant relationship between changes in administrative overheads and profitability of a manufacturing company.

5.4 Recommendations

Based on the findings, the following recommendations were raised:

1. Company policy makers and transaction advisors should be keen on making cost management policies to be applied since they greatly impact on financial performance of the company.
2. Company policies regarding to financial performance of companies should incorporate various cost management strategies since they greatly impact financial performance.
3. Financial policies regarding cost management strategies should be formulated and be used keenly and with a lot of controls to avoid critical financial looses.

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