The Importance Of Cost Volume Profit Analysis In Manufacturing Industry (A Case Study Of Nigeria Bottling Company)
Cost volume profit analysis is a systematic method of examining the relationship between changes in volume [ i.e xutput] and changes in total sales revenue expense and net profit as a model of these relationships cost volume profit analysis simplifies the real word condition that a firm will face like model which are abstraction from reality. Cost volume profit analysis is subjected to a number of underlying assumption and limitation.
Profit is the important measure of a firm performance in the free market economy. Profit is a guide for allocating resource step in financial planning and decision-making step in financial planning and decision –making. The analysis techniques used to study the behaviours of profit in respond to the changes in volum, and price is called cost volume profit analysis (CVP). however, it should be noted that formal profit planning and control also involves the use of budgets and other forecast as a starting point in profit planning cost volume profit analysis helps to determining the minimum sale volume to avoid loosed and the sales volume at which the profit goal of the firm will be achieve
Table of Contents
- Title page
- Table of content
- 1.1 statement of research problem
- 1.2 Objective of the study
- 1.3 Significant of the study
- 1.4 Scope and limitations
- 1.5 Statement of hypothesis
- 1.6 Research methodology
- 1.7 Plan and organization of the study
2.0 Literature Review
- 2.1 The cost volume profit analysis (CVP)
- 2.2 Assumption underlying CVP analysis
- 2.3 Arithmetic cost volume profit analysis
- 2.3.1 Contribution theory
- 2.3.2 Margin of safely
- 2.3.3 Profit volume chart for multi-production firm
- 2.3.4 Relevant range concept
- 2.4 Cost volume profit analysis in a multi production firm
- 2.5 Profit planning and forecasting
- 2.6 Evaluation proposal and segment of the business
- 2.7 Pricing and sale volume decision
- 2.8 Cost reduction
- 2.9 Sales mix decision
- 2.10 Simple device to understanding accounting data
- 2.11 Useful diagnostic tools
- 2.12 Basic information for further profit improvement studies
- 2.13 Limitation of CVP analysis
3.0 Research Methodology
- 3.1 Population under study
- 3.2 Sample under study/simple size
- 3.3 Instrument of data collection
- 3.4 Method of data analysis
- 3.5 Limitation of study
- 3.6 Questionnaire of data analysis
- 3.7 Historical background of case study
4.0 Data Presentation and Analysis
- 4.1 Introduction
- 4.2 Data presentation and analysis
- 4.3 Discussion findings
5.0 Summary Conclusion and Recommendation
- 5.1 Summary of findings
- 5.2 Conclusion
- 5.3 Recommendation
Cost volume profit analysis is a systematic method of examining the relationship between changes in volume (i.e.) output and changes in total saves, revenue expense and net profit. As a model of these relationships cost volume profit analysis simplifies the real word condition that a firm will face like model which are abstraction from reality. Cost volume profit analysis is subjected to a number of underlying assumption and limitation.
Profit is the important measure of a firm performance in the free market economy: profit is a guide for allocating resource affectively on analysis of the effect of various factors on profit is an essential step in financial planning and decision. Making. The analytical techniques used to study the behaviours of profit in respond to the changes in volume, and prices are called cost volume profit analysis (CVP). However. It should be noted that formal profit planning and control also involves the use of budgets and other forecast. As a starting point in profit planning, cost volume profit analysis helps to determining the minimum sale volume to avoid losses and the sales volume at which the profit goal of the firm will be achieve.
Therefore, the survive in today business world as started by outer and brown (1984)”concealed in efficiency have to be tracked down, standard set.
Forecast made and rigorous control must be started to ensure even modest margin of profit. The efficiency and effective management the variances of cost.
Price, output (volume) and ultimately profit will play major determination roles in the growth and survival of an organization. The break-even point is that point of activity (saves volume) where total revenues and total expenses are equal. It is neither profit nor less point. The break-even point can only be archive where there is decision involves price, volume and cost that can be split in to two classifications. Cost volume analysis is the analysis techniques used to study the behavior of profit in response to the analysis techniques used to study the behavior of profit in response to the change in volume, cost and price, it is a device used to determine the usefulness of the profit planning of the firm in the short term.
Cost volume profit analysis sometimes termed break-even analysis is an application of marginal costing and seeks to study the relationship between cost volume and profit at different activity levels and can be useful guides for short term planning and decision making. It is more relevant where the proposed changes in activity are relatively small so that established cost patterns and relationships are likely to hold good, will greater changes in activity and over the long term existing cost structure of the amount of fixed cost and marginal. Cost per unit are likely to change so cost volume profit analysis is unlikely to produce useful guidance
1.1 Statement of Research Problem
The focus of the research is to identify the importance of cost volume profit analysis in manufacturing company with emphasis on Nigerian bottling company Ilorin plant. Hence in the course of the study effort has been made to find solutions to the following research problem.
- For budget planning – it is used to determine the volume of sales required to make profit
- A target profit levels and to determine the margin of safety
- Determining product pricing and sales volume decisions
- For determining optimum production and sales mix
- To determining the importance of capacity utilization on cost.
1.2 Objective of the Study
The study has examined the importance of cost volume profit analysis in manufacturing industry in Nigeria. Due to the role of cost volume profit analysis which play in the effectiveness and efficiency management of a business enterprise.
The aims and objective of the study are:
- To examine the introduction of cost volume profit analysis in Nigeria
- To highlight the reason for the introduction of cost volume profit analysis in Nigeria.
- To critically examine the likely problems for cost volume profit analysis in Nigeria.
Limitation did not hinder effective completion and quality of the research work.
1.5 Statement of Hypothesis
The general hypothesis that was tested in the course of the research is as follow:
Ho: the importance of cost volume profit analysis does not improve manufacturing industry service delivery.
1.6 Research Methodology
Base on the topic of research, made use of both primary and secondary source of information. Primary source which include case study material from internets response from questionnaire while secondary source include text books.
1.7 Plan and Organization Of the Study
The research work has been divided into five chapter one contain the introduction and background of the study. Statement of research problem, aims and objective of the study, scope and limitation, statement of hypothesis, research methodology and plan and organization of the study.
Chapter two treats past and current literature review cost volume profit analysis, assumptions underlying CVP analysis, arithmetic of cost volume profit analysis, contribution theory, margin of safety, profit volume chart for multiproduct firm, relevant range concept, cost volume profit analysis in a multiproduct firms profit planning and foresting, evaluation proposals and segment of the business, pricing and sales volume decision cost reduction, sales mix decision simple device to understand accounting data, useful diagnostic tools, basic information for further profit improvement studies, limitation of CVP analysis chapter three treats brief history of the case study (Nigeria bottling company Ilorin plant) method of data collection, instrument of data collection type and sources of data, sample under study simple size and population under study.
Chapter four discusses data presentation and analysis discussion findings.
Chapter five contains summary of finding conclusion and recommendation.
Summary, Conclusion and Recommendation
5.1 Summary of Finding
The objective of study where to predict and evaluation the implication of short run decision about fixed cost variable cost volume and selling price in profit planning and to determine whether the assumption underlying the cost volume profit analysis can be applied in practice and also to establish the relationship existing between cost profit volume
A brief statement of the problem of the study was made which discussed in brief of history of the company studied suggested various authors and their contribution to the development of cost volume profit.
In conclusion, the determination of the actual relationship of cost and profit to volume of sales in the company was one of the basic objectives of the study. The determination of how the cost volume profit analysis is important to the manufacturing organization is another objective of the studying and their effecting profit planning and forecasting cost reduction, pricing and product decision is another objective of the study. Conclusion can be drawn that most of the underlying assumption of the cost volume profit analysis were obtained in the company through other factors had a significant effect on the variation in cost and profit from volume.
The accountant must be knowledgeable in the cash behavioral pattern of cost items if he is to forecast future cost with reasonable accuracy similar to cost items if he is to forecast future cost with reasonable accuracy. Similar t o that is whether to cost volume profit analysis can be applied in practice particularly in the company selected for the study.
The response give to the contents of the questionnaire show that most of the assumptions of the analysis were valid to the company. However, one should jump to conclusion that the analysis could be easily adopted for policy decision in the company because other facts such as the results of the analysis should be understood before drawing conclusion based solely on the response to the questionnaire.
Finally, a major conclusion can be drawn that the concept of the case volume profit analysis should belled and the content be well understood before the application in order to achieve the organization goods such as plans in order to minimize the risk and uncertainly so that problem of profit and other associated problems will not size.
Limitation and possible misinterpretation of cost volume profit analysis studies by the management accountant. This stand point in formed by the fact that technique provides valuable information for the guidance of management in decision making based upon finding the following suggesting are given to the manufacturing organization and any other interest parties.
- The concept of cost volume profit analysis aubit is very useful in the planning of budget, because management would be able to consider the volume of output required marking profit and margin for safety of a company.
- The break-even point is relevant for short time managerial decision making at it provides management with useful information for decision to pricing the product to be dropped or adopted a new product line.
- The relationship of factor financial manage or the management accountant, evaluating the profit plant of budget and realize that a change in one factor can lead to change in other factors. Therefore, all such change should be carefully visualized and their impact on profit must be seen.
- The management should guide against basing their cost volume profit decision on the relationship depicted in the cost volume profit analysis alone, should accompanied by other decision tools such as a found budgeting system.
- Finally, the management understands the assumption of the cost volume profit analysis very well before using bit in policy decision it should be used only for short run operational decision usually one year so that variation from expectation could be easily identified an appropriate action take in time
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