COST CONTROL AND ITS IMPACT ON MANUFACTURING COMPANIES (A CASE STUDY OF MANUFACTURING FIRMS IN AKURE)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Businesses and in particular the manufacturing companies are finding it difficult to increase their profits and sales volumes due to various factors Mapakame (2014). 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. Cost control measures 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 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) 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). Manufacturing companies 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 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. 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. Furthermore, Mhlanga (2017) denoted that, the deteriorating operating environment of Nigeria‟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 there is need to address Nigeria’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 cost control measures (Abdul and Isiaka, 2015). Siyanbola and Raji (2013) on their study on the impact of cost control on Manufacturing Industries‟ profitability cited that cost control 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 cost control 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 cost control and cost reduction techniques in organizational performance revealed that there is a direct relationship between cost control and manufacturing companies. Thus, the study examines cost control and its impact on manufacturing companies (a case study of manufacturing firms in Akure).

1.2. STATEMENT OF PROBLEM

Since management is concerned with growth and profitability, which is measure of business performance, especially in a manufacturing concern, the need for higher sales will arise and this will facilitate the need to increase production capacity, which in turn brings about increase in cost. Brumbaug (2008) was of the opinion that corporate bodies should watch the cost and the profit will take care of itself. The implication is that cost should be controlled rather than embarking on unscientific cost reduction that may translate to lowering the quality of product. Management is normally forced to adopt various methodologies and techniques in order to regulate (control) rather than reduce cost. Cost increases as various production activities are embarked upon and the need to keep cost in check arises because standards for production will be set and actual production will be made thereby bringing about variances which can only be reduced or eliminated through effective cost control. Hence the study examines cost control and its impact on manufacturing companies.

1.3. AIMS OF THE STUDY

The major aim of the study is to examine cost control and its impact on manufacturing companies. Other specific objectives of the study include;

1. To examine the cost control applications and system used in manufacturing firms in Akure
2. To examine steps in implementing a cost control system in manufacturing firms in Akure
3. To examine the impact of cost control on manufacturing companies in Akure
4. To examine functions of an effective cost control system in manufacturing firms in Akure
5. To examine the relationship between cost control and manufacturing companies in Akure
6. To examine merits of effective cost control strategies to increase profit margins in manufacturing firms in Akure

1.4. RESEARCH QUESTIONS

1.  What are the cost control applications and system used in manufacturing firms in Akure?
2. What are steps in implementing a cost control system in manufacturing firms in Akure?
3. What is the impact of cost control on manufacturing companies in Akure?
4. What are functions of an effective cost control system in manufacturing firms in Akure?
5. What is the relationship between cost control and manufacturing companies in Akure?
6. What are merits of effective cost control strategies to increase profit margins in manufacturing firms in Akure?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. : There are is no significant impact of cost control on manufacturing companies in Akure.
2. : There is a significant impact of cost control on manufacturing companies in Akure.

Hypothesis 2

H0: There is no significant relationship between cost control and manufacturing companies in Akure.

H1: There is a significant relationship between cost control and manufacturing companies in Akure.

1.6. SIGNIFICANCE OF THE STUDY

The study will be of profound benefits to enlighten the people on the impact of cost control system on the manufacturing companies. This study would also be of immense benefit to students and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to examine cost control and its impact on manufacturing companies.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 OPERATIONAL DEFINITION OF TERMS

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

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