Impact Of Inventory Valuation Methods On The Profitability Of Champion Breweries Plc

Project and Seminar Material for Business Administration and Management BAM

Impact Of Inventory Valuation Methods On The Profitability Of Champion Breweries Plc


Abstract


The research work titled “impact of inventory valuation methods on the profitability of Champion Breweries Plc”. The general objective of this study is to appraise inventory management and control in manufacturing firm. The specific objectives are to: examine the effectiveness of the various tools and techniques (Economic order quantity and Economic Batch Quantity) used by manufacturing firms in inventory management and ascertain the extents to which inventory control contribute to profitability in manufacturing firms. This study adopted the ex-post factor and descriptive research design. This study is anchored on theory of Economic order quantity (Wilson EOQ). The area of the study is manufacturing firms’ precisely one manufacturing firm,Champion Breweries. The instruments used were main sources from both Primary data and Secondary data. The primary data was obtained using oral interview and properly structured questionnaire while the secondary data for the study were obtained mainly from textbooks, journals and internet articles. A simple percentage approach was employed to analyze the questionnaire while the hypothesis were tested using Regression Analysis at 5% level of significance. The analyses were performed using the Statistical Package for Social Sciences (SPSS) Version 20. The study found that the various tools and techniques of inventory management adopted in manufacturing firms are effective since the significance value (p-value) of 0.046 < 0.05. it further found that inventory control has contributed significantly to the net profit of manufacturing organization(Champion Breweries plc) with (p-value) of 0.005 is less than 0.05. It therefore recommended that manufacturing firms should diversify their inventory system to suit specific needs of production and at the same time ensure that maximum attention is paid to inventory management so as to avoid or reduce the amount of loss that would be gotten from damaged goods in inventory.


Chapter One


Introduction

1.1 Background to the Study

The complex nature of today’s business world and the transformation of the entire world into a global village have been of great concern to managers of all forms of business organization. Because of this, managers are making conscious efforts researching on the most effective and efficient inventory valuation methods that will facilitate adequate profitability. The subject of this research is to determine the extent to which inventory valuation can facilitate profitability.

However, the word inventory, as known by the Americans and stock by British is indispensable in any manufacturing, merchandising and servicing organization. According to Welsch et al (1982: 222) “inventories are assets consisting of goods owned by the business at a particular time and held for future sales or for utilization in the manufacturing of goods for sales”. The types of inventories available differ depending on the nature of the business undertaking. For instance, a manufacturing company will make use of a raw material; work – in – progress and finished goods inventories, while trading organizations will make use of only finished goods inventories.

Inventory generally represents an active asset because of their constant usage and replacement Pugh and seizer (1980: P .233). Therefore, the problem of safeguarding inventories is akin to protecting profit. The profitability of any manufacturing company is hindered by inadequately controlling the danger associated with inventory management. That is, over investment and under investment in inventory. Advisability of adequate stocking of items for sales, coupled with the risk of loss and cost of over stocking, create critical management planning and control problems. Failure to value inventories and to account for inventories can lead to business failure. Therefore in valuing inventory, the company’s objectives should be wealth maximization, which can be achieved by determining the optimum level of inventory sufficient for profit maximization.

However, inventory valuation in an organization is one of the key ingredients for efficient performance, which is further translation into profitability. Further more, inventory valuation involves the making of decision on the level of inventory that may be economically needed to meet the requirements for planned production and maximization of profit. Since all manufacturing companies are assumed to be “going concern”, long term survival, which comes from profitability is sometimes adjudged to be, the most important business objective. No manufacturing company can operate without material inputs, which in turn determine its output. Before any company is said to have effectively implemented its inventory valuation methods, there must have been an internal communications between different units and departments. The department of sales / marketing are the first to spot out changes in demand. This change must be worked into the company purchasing and manufacturing schedules, and the financial manager must arrange any financing that will be needed to support the inventory build-up. Therefore the neglecting of the inventory valuation will jeopardizes its long –run profitability and may fail ultimately.
It is against this backdrop that the study appraises the inventory management and control in manufacturing firms.


1.2 Statement of the Problem

Inventory is the life blood of any organization. This is because inventory contributes directly to the profitability of an organization more so the growth of any organization depends largely on its ability to manage its inventory effectively and efficiently.

The real problem therefore has been in the determination of the best inventory control method that fits into an organization very well and also to get the best inventory level at which money invested in inventory will produce a rate of return higher than it if invested in some other areas of the business (Amoako-Gyampah&Gargeya, 2011). Manufacturing firms are finding it challenging as to determination of how much of the inventory is the ideal stock as to maintain. If inventory level is high, capital is unproductively tied up. If the level of inventory is low, production will be affected.

However, this study aim to carry out an investigation on the relationship between inventory management control technique and performance of manufacturing firm and also find the extent to which inventory control has effect on performance of a manufacturing firm.

Poor inventory management involves poor planning, executing and controlling a supply and utilization of chain network inventory that is critical to the success of the organization. Inadequate control of inventory consist of lack of managerial skills relevant to proper inventory management exposes many organizations to many problems like overstocking, damage, deterioration and others.

Problem of deciding which item of inventory should be kept in stock and at what quantity lead to need for Economics Order Quantity (EOQ) in an organization. Some organization looses much due to their failure to keep with EOQ desirable for them, and this work throws more light to forestall this.

The problem of not implementing the inventory management systems; Many organizations do not keep abreast with inventory management systems due to poor or no knowledge about the inventory management and such organizations are bound to face several related problems that this work highlights on towards reducing them.

Also, in some manufacturing firms, they find it difficult to determine how much of the inventory to order and when to order; in order to meet customers demand and smooth flow of production process without unnecessary stoppage, idle time due to unavailability of inventory.


1.3 Objectives of the Study

The overall objective of this study is to appraise inventory management and control in manufacturing firms of some selected manufacturing firms.

The specific objectives are to:

  1. Examine the effectiveness of the various tools and techniques (Economic order quantity or Economic Batch Quantity) used by manufacturing firms in inventory management.
  2. Ascertain the extents to which inventory control contribute to profitability in manufacturing firms.
  3. Examine how effective inventory valuation method create positive impact on the corporate profitability?

1.4 Research Questions

The study will be guided by the following research questions:

  1. How effective are the various tools and techniques of inventory management in manufacturing firms?
  2. To what extent has inventory contributed to profitability in manufacturing firms?
  3. How does effective inventory valuation method create positive impact on the corporate profitability?

1.5 Research Hypothesis

The under-stated hypotheses will be tested in the course of this study:

  1. Ho1: Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are not effective.
    HA: Economic order quantity (EOQ) and Economic Batch Quantity (EBQ) techniques of inventory management adopted in manufacturing firms are effective.
  2. Ho2: Inventory control has not contributed significantly to the net profit of manufacturing organization.
    HA: Inventory control has contributed significantly to the net profit of manufacturing organization.

1.6 Significance of the Study

Future Investors:

This research work can be of great help to those who have a little or no knowledge in manufacturing business. It will be valuable to people who are interested in the manufacturing business and wish to make it their career.

Manufacturing Firms:

The research work can help the Manufacturing Company to improve in areas where it is needed in their inventory operations so as to boost their profitability and consequently increase their shareholders wealth, and to assist the organizations to maximize their profits and reduce their risk of liquidity.

General Public:

Indeed, this will in no little way have effects on the national growth and development of Nigeria manufacturing sector and economy at large. Customers’ goodwill towards the organization will be maintained as it enables delivery committed to be met all the time.

Future Researches / Academia:

This work will be of immense benefit and use to the future researches as reference document and will provide a base for other research works that might be carried out on stock management in any other sector.


1.7 Scope of the Study

This study is focus at a particular manufacturing company in Akwa Ibom state. This manufacturing company is selected based on its costing method, i.e. process costing. The selected company is champion Breweries plc of which my study is limited to.


1.8 Limitations of the Study

In conducting this research work, the researcher encountered some difficulties such as the following:

a. Hoarding of Data:

Manufacturing firms held tightly their methods and data generated from their operations because they argued that they operate in a competitive industry and would not want to release their secret to their competitors.

b. Paucity of Relevant Literatures:

The researcher found it hard in obtaining relevant literatures while conducting this research. Nevertheless, the researcher was able to surmount the above hurdles and at the end put up a research work whose output is reliable, testable and verifiable at any standard.


1.9 Definition of Terms

Management:

Management consists of the interlocking functions of creating corporate policy and organizing, planning, controlling, and directing an organization’s resources in order to achieve the objectives of that policy.

Inventory:

Inventory is the raw materials, work-in-process products and finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders.

Control:

Control is a systematic effort to set performance standards with planning objectives, to design information feedback systems, to compare actual performance with these predetermined standards, to determine whether there are any deviations and to measure their significance, and to take any action required to assure that all corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives.

Inventory Management:

Inventory management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.

Inventory Control:

Inventory control, also known as stock control, involves regulating and maximizing your company’s inventory. The goal of inventory control is to maximize profits with minimum inventory investment, without impacting customer satisfaction levels. Inventory control is also about knowing where all your stock is and ensuring everything is accounted for at any given time.

Manufacturing Organization:

This is organizations that primarily produce a tangible product and typically have low customer contact. They produce physical, tangible goods that can be stored in inventory before they are needed.

Costing Techniques (Methods):

Costing techniques are methods for ascertaining cost-for-cost control and decision-making purposes. They can be applied to make-or-buy decisions, negotiation, price appraisal and assessing purchasing performance.

Cost Centre:

A cost center is a department within an organization that does not directly add to profit but still costs the organization money to operate. Cost centers only contribute to a company’s profitability indirectly, unlike a profit center, which contributes to profitability directly through its actions.

Economics Order Quantity (EOQ):

The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.

Just-in-Time (JIT):

Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.

Ordering Cost:

Ordering costs are the expenses incurred to create and process an order to a supplier. These costs are included in the determination of the economic order quantity for an inventory item.

Stock-out Cost:

Stock-out Costs is the cost associated with the lost opportunity caused by the exhaustion of the inventory. The exhaustion of inventory could be a result of various factors. The most notable amongst them is defective shelf replenishment practices.


Chapter Five


Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings

Based on the above finding, the study empirically came out with the followings:

  1. That the various tools and techniques of inventory management adopted in manufacturing firms are effective since the significance value (p-value) of 0.046 < 0.05, meaning that the model is significant.
  2. That inventory control has contributed significantly to the net profit of manufacturing organization(Champion Breweries plc) since the significance value (p-value) of 0.005 is less than 0.05 meaning that the model is significant.

Other findings of the study are:

That some of the reasons why organization evolve inventory control management system include the need to smoothening operational requirements; maintain accountability and transparency, the need to optimize resources and meeting up operational requirement.

The study also found out that flexibility in inventory control management is an important approach to achieving organizational performance. Flexible inventory services are associated with minimizing stock holding cost, minimizing waste and encouraging high inventory utilization.

In addition, it was found that organizations benefits from inventory control management by way of easy storage and retrieval of material, improved sales effectiveness and reduced operational cost.


5.2 Conclusion

Inventory Management is very vital to the success and growth of manufacturing firms. The entire profitability of manufacturing firms is tied to the volume of products sold which has a direct relationship with the quality of the product. Management does a lot to present a good organization to the public in terms of quality production. Good inventory management in any manufacturing organization saves the organization from poor quality production, disappointment of seasoned customers, loss of profit and good social responsibility. This is done by ensuring timely delivery of raw materials to the factory and distribution of finished goods, in order of production to the warehouse.

Thus, if inventory management is not adequately maintained, production cannot meet the aspirations of customers which are loss of revenue to the organization. Right from procurement to the time of processing, quality of raw material is the chief determinant of the productive efficiency of any manufacturing concern. This varies from organization to organization. This study concludes that the various tools and techniques of inventory management adopted in manufacturing firms are effective and inventory management has significant impact on manufacturing company.


5.3 Recommendations

Based on the findings of the study, the researcher made the following recommendations:

  1. The manufacturing firms should diversify their inventory system to suit specific needs of production and at the same time ensure that maximum attention is paid to inventory management so as to avoid or reduce the amount of loss that would be gotten from damaged goods in inventory.
  2. Inventory management should maximize space and timely delivery to avoid staying off production and closely monitor and manipulate their inventory system to maintain production consistency for organizational profitability and effectiveness.
  3. Nigeria manufacturing firms should not take the issues of inventory management lightly because it has the power to make or mar the future of the organization liquidity position.

5.4 Contribution to Knowledge

The study has contributed to body of literature by providing empirical evidence on appraisal of inventory management and control in manufacturing firms using the following variables Effective management tool, Inventory management, Profitability and Productivity. In line with this, it has to a very large extent achieved the following objectives: effectiveness of the various tools and techniques used by manufacturing firms in inventory management; significant consequences of inefficient inventory management on the productivity of manufacturing firms in Nigeria and extents to which inventory control contribute to profitability in manufacturing firms.


5.5 Suggestion(s) for Further Studies

The study established the fact that inventory management and control is essential for smooth and effective running of manufacturing firms in Nigeria. The implication is that it is a vital tool in improving asset productivity and inventory turns, targeting customers and positioning products in diverse markets, enhancing intra and inter-organizational networks, enriching technological capabilities to produce quality products thereby imparting effectiveness in inter-firm relationships. Proper inventory management even results in enhancing competitive ability and market share of small manufacturing units. It is based on this that this study suggest that other research should take up the responsibility to broaden the scope of this study by looking at the effect of inventory valuation management on manufacturing firm performance which this study is limited to as the findings in this study might not be generalized to other firms. Other sub variables such as risk management, tax written off and cost of borrowing (Inventory valuation management) and profitability, productivity and sales (firm performance).


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