The Impact Of Costing Techniques On Profitability Of A Manufacturing Company

Project and Seminar Material for Accountancy / Accounting

Abstract

This study sought to analyze costing techniques and their impact on profitability of manufacturing companies. An increase in cost (operational and production costs) which added to reduced profitability in the manufacturing sector produced the need to address the problem through this research. The study was limited to costing in manufacturing industry and as such it did not extend to other sectors of the economy. It was based on the assumption that all the responses from the company Primeseed.co represented other manufacturing companies. Descriptive research approach was used to fully satisfy the objective of the study as it gave the researcher to obtain important and useful data which was valid and reliable. Quantitative and Qualitative approaches were used to collect data. Primary data was obtained from a target population of 30 employees from departments of Primeseed.co. Major research findings showed that costingtechniques have a positive impact on the profitability of manufacturing companies as reducing costs directly reflect an increase in the level of profits of an organization, it was evident that element of costs such as materials, labor and overhead costs and workers behavior could be strategically controlled with techniques like budgetary control, standard costing and variance analysis, accounting to achieve higher profit levels. In controlling costs a good costing system is required to minimize costs as wastages is eliminated and inefficiencies reduced during production and throughout an organization. Also from the findings, increase in labor costs, material wastages, increase in repairs and maintenance cost and decrease in operational performance were the effects of implementing weak costing techniques.

Chapter One

Introduction

This chapter covers the background to the study, statement of the problem and the objectives of the study. It also highlights research questions, significance of the study and assumptions. Also, delimitation of the study, limitation of study, definition of terms follows and the chapter concludes with the summary.

1.1 Background to the Study

An increase in manufacturing costs and reduced sales revenue which has added to reduced profitability in the Manufacturing sector has produced the need for me to address the problem through this research. Mapakame (2014) reported that businesses and in particular the manufacturing companies are finding it difficult to increase their profits and sales volumes due to various factors. In an economy where consumer‟s disposable incomes are very low, a few companies are experiencing any meaningful increases in market share or sales volumes. Reduced growth prospects are being accompanied by increased costs. Generally, the costs of production and other operational costs in this economy are very high as noted by Lynton-Edwards Securities (Mapakame, 2014, p. 4). Reduced sales volumes and high cost of production has led to reduced profitability in these industries. Faced with limited sales growth prospects, companies have to focus on costs which are a major determinant in profitability level. Costing techniques have had and need to be used in manufacturing companies to control and reduce costs to such levels which aid profitability (Mapakame, 2014).

Bloch (2014) reported on how the manufacturing sector has declined with many enterprises ceasing operations and others downsizing production levels. Factors which contributed to this decline since 2008 include rampant hyperinflation, which consequently led to increased production costs, reduced consumer disposable income and minimal availability of investment. Bloch (2014) reported that, although there has been improvement after dollarization, inflation was combated and an „upward surge in manufacturing costs‟…immense surges in wages and salaries, materials and other costs‟ were main contributors to increased costs. There is no doubt that increased costs affect negatively the operations, profitability and performance of an enterprise (Bloch, 2014).

Kachembere (2015) also reported that, Zimbabwe manufacturing industry‟s output contracted by a negative 4.9% in 2014.The economic report from the Central bank of Zimbabwe as cited by Kachembere (2015) revealed that the massive decline in manufacturing output were due to persistent challenges affecting the sector, which included antiquated plant and machinery, high costs of production, influx of cheap imports and weak effective demands. High production costs were one of the major constraints that affected the revenues and profits of many manufacturing companies in the country (Kachembere, 2015).Data obtained from the Master of High Court, companies placed under judicial management rose from 51 in 2013 to 60 by the end of 2014, whilst 87 companies were liquidated in 2014, compared to 44 in 2013 (Kachembere, 2015).

Manufacturing companies such as Delta beverages, producer of both alcoholic and non- alcoholic beverages, registered a 10 % decline in revenue for the period ended March to December 2014, it has been suffering falling revenue since 2014 and in its financial results for the six months to September 2016, Delta‟s revenue declined by 80% over the same period in the previous year to US$246.6 million thus having a significant negative impact on its profitability (Mhlanga, 2017).

Furthermore, Mhlanga (2017) reported financial results from the Zimbabwe Stock Exchange‟s listed companies, which revealed that the business environment of the country remained subdued with profits of many manufacturing companies declining. Mhlanga (2017) pointed out that performance of the companies were affected by depressed incomes due to increased job losses and cost pressures. Zimbabwe‟s main companies such as British American Tobacco Zimbabwe (BAT) a cigarette manufacturers, in 2014 reported US$16.3 million, 2015 was US$15 million profit, posted a US$ 8.4 million during the year ended December 2016 showing a decline (Mhlanga, 2017).
According to Mhlanga (2017), BAT managing director reported that the company sales volumes for the year 2016 declined by 21%, total revenues were US$34.1million, a 25% reduction from that of 2015. Cash generated from operations was $13.3 million, which was 13% down from $15.3 million achieved in the year ended 31 December 2015. Also, financial results for Edgars and Truworths, the country‟s largest clothing retailers that operate manufacturing units which showed a deterioration in the economy. Edgars reported a subdued performance for the 52 weeks to January 2017, its revenue during the period under review went down to US$52 million from US$64 million recorded in the previous period. Profit for the year 2016 slumped to US$548 163 from US$4 million registered from the previous year. Truworths first half performance to January 2017, sales declined by 40.8% to US$6.53 million compared to US$11.3 million of the previous period (Mhlanga, 2017).

Furthermore, Mhlanga (2017) denoted that, the deteriorating operating environment of Zimbabwe‟s industries was caused in part by foreign currency shortages, cost pressures, depressed demand and declining local industries competitiveness. This resulted in subdued performances across many companies. The weak economic activity resulted in many manufacturing companies failing to experience an increase in sales and in those few that were experiencing increase, the sales were increasing at a decreasing rate (Mhlanga, 2017). Mazambani (2017) was of the opinion that, for manufacturing sector to improve its capacity and profitability, evidenced by a decline of capacity utilization from 47.4% in 2016 to 45.1% in 2017, there is need to address Zimbabwe‟s costs structure as costs were amongst the major factors that constrained capacity utilization and it affects the final product cost. To regulate costs and improve profitability companies have to establish costing techniques (Abdul and Isiaka, 2015).
Siyanbola and Raji (2013) on their study on the impact of costing on Manufacturing Industries‟ profitability cited that costing is of utmost importance in every business concern, the negligence of which will affect the earnings at any point in time and in controlling costs, wastage is eliminated during the course of production and even during the administrative, selling and distribution activities. In their research budget was considered as the basic tool for achieving effective costing and their study was conducted in West Africa, on West African Portland Cement Company. Questionnaires were used as research instruments.

Akeem (2017) study on the effect of costing and cost reduction techniques in organizational performance revealed that there is a direct relationship between costing, reduction and profit. Thus, the study concluded that for an organization to ensure more profit growth, there is need to control and reduce cost to an acceptable limit. The research study was conducted in Nigeria which has a different micro and macro environment with Zimbabwe.

1.2 Statement of the Problem

An increase in costs (operational and production costs) which has added to reduced profitability in the Manufacturing sector has produced the need to address the problem through this research.

1.3 Research Question

What is the impact of costing techniques on profitability of manufacturing companies? A case study of Primeseed.co.

1.4 Research Questions

What is the objective of costing?
What are the requirements needed to ensure an effective costing system?
Which costing techniques are involved in the costing process?
What are the effects of implementing weak costing techniques?

1.5 Objectives of the Study

To understand the objective of costing.
To understand the requirements needed to ensure an effective costing system.
To examine costing techniques that are involved in the costing process.
To determine the effects of implementing weak costing techniques.

1.6 Significance of the Study

To the Researcher

The research will give me a platform to integrate theoretical fundamentals mastered during my studies at the University with the practical aspects of the economy. This research will also contribute to the furtherance of the researcher’s knowledge in costing systems applied in industries. It will also aid in gaining knowledge extensively on costing techniques and their impact on profit maximization.

To the University

After completion, the research will highlight various costing techniques used which are involved in costing process, requirements needed to ensure an effective costing system and to understand the effects of implementing weak costing techniques. This will be helpful to fellow undergraduates who will study costing thus providing a line of thought to these students. Also, the research will provide more information on the university‟s library.

To the Organizations

The research will assist management of various manufacturing companies, in having time to reflect on the difficulties they are experiencing on costing. It will highlight areas where costing techniques have been used to perfection and the impact of costing techniques on profitability. The research will also assist those charged with governance on understanding the effects of implementing weak costing methods.

1.7 Assumptions

Information provided is free from bias.
All responses from the company Primeseed.co represents other manufacturing companies.
Population selected has a great understanding of the subject matter.

1.8 Delimitations of the Study

The research is conducted in Harare. The targeted population of this study include departments of Primeseed.co. This study is limited to costing in manufacturing industries and as such it does not extend to other sectors of the economy. Participants will be drawn from Primeseed.co departments which are finance, human resource, production and processing, sales and marketing and quality control. Questionnaires and Interviews are used as research instruments for the study.

This research covers the period from 2014 up to 2016.

1.9 Limitations

Respondents may be unwilling to cooperate or respond due to work pressure or confidentiality reasons. The researcher will focus on major areas concerning the research so as to save respondent‟s time.
Some information desired might not be released as such information may be deemed highly confidential to the company. Clarification on the use of information i.e. information required is used for academic research.

1.10 Definition of Key Terms, Abbreviations and Acronyms

Cost

Oluwagbemiga et al (2014) defined cost as the monetary value that a company has spent in order to produce a unit.

Costing

Akeem (2017) defined costing as a process of averting wasteful use of valuable resources and encouraging efficiency and cost consciousness.

Profitability

Oluwagbemiga et al (2014) defined profitability as the excess of revenue and cost.

ACCA

Associations of Chartered Certified Accountants

ICSA

Institute of Company Secretaries of India

ICAI

Institute of Chartered Accountants of India

CIMA

Chartered Institute of Management Accountants

Chapter Five

Summary, Conclusions and Recommendations

5.1 Summary of the Research

Chapter one showed the background to the study, statement of the problem and the objectives of the study. It highlighted research questions, significance of the study and assumptions. Also, delimitation of the study, limitation of study, definition of terms followed and the chapter concluded with the summary.
Chapter two gave a literature review of views and opinions of other scholars. The researcher reviewed the literature using the research objectives.
Chapter three outlined methods and procedures used to conduct the research. The chapter was structured as follows: Research design, target population. It also included validity and reliability of research instruments, ethical consideration and lastly data collection procedures. Quantitative and Qualitative approaches were used to collect data. Primary data was obtained from a target population of 30 employees from departments of Primeseed.co.
Chapter four focused on the data presentation, analysis and interpretation. The gathered data was presented using tables, pie charts and bar graphs. The presented data was analyzed and conclusions were made basing on the mode.
Chapter five gave a summary, conclusions and recommendations and suggestion for further studies.

5.3 Major Research Findings

5.3.1 The Objective of Costing

Findings from the research showed that reducing costs directly reflect an increase in the level of profits of an organization. It is clear that profit can be increased by manipulating costs thus costing techniques have a positive impact on business profitability to a larger extend. Also, costing increase chances of an organization to sale its products at a lower price than its competitors. There is a general consensus that the manufacturing sector‟s performance is being affected by very high cost of production and operational cost thus leadership in this sector are learning towards controlling costs.

The researcher concluded that the objective of costing is to regulate and reduce unwanted costs. Therefore, costing techniques have a positive impact on business profitability as it is clear that profit can be increased by manipulating costs. Also, costing increases chances of an organization to sale its products at a lower price than its competitors.

5.3.2 The requirements needed to ensure an effective costing system

Findings from the research showed that costing relies heavily on the existence of a sound and effective costing system. To ensure an effective costing system, every employee should be involved in suggesting costing initiatives within organization‟s departments. Although, findings from the research showed that there is lack of inclusion of lower level employees in suggesting costing initiatives.

Findings from the research concluded that companies should carry out educational awareness on costing issues.

The researcher concluded that requirements needed to ensure an effective costing system, companies should carry out educational awareness on costing issues, every employee should be involved in suggesting costing initiatives within organization‟s departments as managers alone cannot control cost and an effective costing system is formed on the back of strong cost consciousness.

5.3.3 Costing techniques that are involved in the costing process

The research showed that management costing techniques such as budgets and budgetary control, standard costing and variance analysis helps in reducing costs. It is evident that element of costs such as materials, labor and overhead cost can be strategically controlled with techniques like budgetary control, standard costing and variance analysis, accounting to achieve higher profit levels.

The researcher concluded that budget and budgetary control, standard costing and variance analysis are costing techniques that are involved in the costing process. Also, kaizen costing and target costing are management techniques that can be used to control costs and gain competitive advantage in the market.

5.3.4 The effects of implementing weak costing techniques

Findings from the research showed that, effects of implementing weak costing results in increase in labor costs, material wastages, increase in repairs and maintenance cost and decrease in operational performance.

The researcher concluded that increase in labor costs, material wastages, increase in repairs and maintenance cost and decrease in operational performance are the effects of implementing weak costing techniques.

5.4 Conclusions

The study sought to analyze costing techniques and their impact on profitability of manufacturing companies. An increase in cost which added to reduced profitability in the manufacturing sector motivated the study. The research objectives were to understand the objective of costing, to understand the requirements needed to ensure an effective costing system, to examine costing techniques that are involved in the costing process and to determine the effects of implementing weak costing techniques.

All the research objectives were achieved and it was concluded that costing techniques have a positive impact on business profitability as it is clear that profit can be increased by manipulating costs. It was evident that element of costs such as materials, labor and overhead costs and workers behavior could be strategically controlled with techniques like budgetary control, standard costing and variance analysis, accounting to achieve higher profit levels. In controlling costs a good costing system is required to minimize costs as wastages are eliminated and inefficiencies reduced during production and throughout an organization. Also from the findings, increase in labor costs, material wastages, increase in repairs and maintenance cost and decrease in operational performance were the effects of implementing weak costing techniques.

5.5 Recommendations

Findings from the research showed that there is lack of inclusion of lower level employees in the decision making and initiatives concerning costing techniques. Management should involve all workers in suggesting costing initiatives within departments as management alone cannot control costs and costing is a recurrent process that requires the support and involvement of all employees at all times.
Also, companies should carry out awareness campaigns programs on the importance of costing within the organization. These meetings and campaigns should be occasionally carried out monthly or quarterly and importance of cost minimization should be explained to employees. Findings from the research concluded that the majority of the respondents were uncertain on whether costing techniques such as Value engineering and Kaizen can be used to gain competitive advantage in costing.
Companies should employ other management techniques such as kaizen costing, value analysis and target costing used to control costs and gain competitive advantage in the market as from the research findings majority of the respondents were uncertain on whether costing techniques such as value engineering and kaizen can be used to gain competitive advantage in costing.

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