Cost Volume Profit Analysis As A Tool For Profit Planning And Control

ABSTRACT

This research work focused on the use of cost volume profit analysis as a tool for profit planning and profit planning and control; with Nigerian Bottling Company, 9th mile Enugu as a case study. In the course of my study, it was realized that lot of problems or challenges are being encountered by the company like problem of how to make use of the available scarce resources in order to achieve the objective of profit maximization, there is no practical application of cost volume profit analysis in the economy. The general objective of this study is to find a way of making use of scarce resources in achieving profit maximization. So many libraries were used and lot of textbooks, journals, financial statement and newspapers were consulted during the collection of secondary data. Oral interviews and questionnaires were also used to source for primary data different levels of management officials of Nigerian Bottling Company Plc were interviewed and questionnaires were distributed, sixty-seven questionnaire were returned and analysed which served as our basis of recommendation simple percentage (%) calculation and chi-square statistical methods were used in analyzing the data collected and in testing the hypothesis. It was recommended that for analysis cost control purpose, workers should be enlightened on the objectives of the organization and department estimates as this would inculcate in them a sense of recognition of their corporate importance by the management.

CHAPTER ONE

INTRODUCTION

1.0     BACKGROUND OF STUDY

     Many industries today are facing problems due to the expansion through increased sale and the introduction of new product. Some on the other hand are facing problem of contraction owing to the introduction of substitute maternal. It is vital that management should be in position to plan for these changing levels of activities.

     Apart from the problem of contraction and expansion during economic depression, am enterprise may be faced with the alternative of closing down or selling its products at a price below the total cost. Hence profit planning and control becomes difficult as a result of product offered and the action of competitor in order to solve the problem created by the above situations profit planning, cost and their bahaviour at different separating level, one of the most important tools developed by accountants to assist management in meeting the challenges is cost volume profit analysis.

      According to I.M Pandey the analytical technique used to study the behaviour of profit in response to changes in volume, cost and price is called ‘‘cost volume profit analysis’’ it is a device used to determine the usefulness of the profit planning process of the firm . the entire field of profit planning has become associated with the cost volume profit relationship.

BACKGROUND OF NIGERIAN BOTTLING COMPANY PLC

    For an in depth study of this project topic ‘‘cost and control in industries” it is important that I narrow down the industry to a firm-Nigerian bottling company plc. It is therefore pertinent to review the history of the company.

          The breweries of coca-cola dates back to 18th may, 1886 in Georgia. In 1886, coca-cola was first made by Dr. John Styth pemperton a pharmacist. He made coca-cola in his home in Atlanta Georgia USA. Dr. Pemperton and his partner Frank.M. Robinson were the people who gave coca-cola its name and also designed the scripts that distinguished the famous trademark. Coca-cola came into Nigeria in 1953 with the help of Dr. Pemperton’s advertisement and marketing activities. However, in 1953, the Nigerian Bottling company installed its first plant in Lagos a section of the plant ensures that the bottles are hygienically clean and chipped. Another section produces a solution called simple syrup when purely required sugar is added to pine drinkable water. Then the syrup is passed through a filter to ensure its purity, then it mixed with undiluted coca-cola solution known as concentrate. Carbon dioxide gas (co2) is now added to give you refreshing coca-cola.

          The advertisement programme brought the consumption capacity of the Nigerians to about seven million bottles per day. For expansion purposes, other drinks were produced like fanta orange, fanta ginger, fanta tonic, sprite, krest, soda and tonic water. This is done to satisfy people who due to one reason or the other or by choice prefers one to the other. This drink has already gained wide acceptability in the market. Nigerian Bottling company plc. has helped in developing other industries like Delta Glass company which produces some drinks bottles, crown Benin plastic company which makes plastic cases for bottles. In so doing, this has led to the creation of employment opportunities for many Nigerians, it also has several dealers for its products all over Nigeria al who are called once a week. In addition, Nigerian bottling company plc is the largest manufacturer of carbon dioxide (co2) gas used for making drinks.

          The company has extended its hand of development to the society as a reward for patronizing its products mainly through philanthropic activities i.e. the company is a leader in the cruder for environmental protection. It is also a major sponsor of sporting events, it sponsors activities such as.

(a)              Football-both are national and local competitions

(b)             The conservation movement.

(c)              Activities of the desirable.

(d)             Many communal events and projects etc.

1.1     STATEMENT OF PROBLEM

          The challenges facing management is numerous particularly during the period of economic depression characterized by liquidation of many companies, low capacity utilization, shortage of foreign exchange to buy needed raw materials and the advanced state of competition.

(1)             Management is faced with the problem of how to make use of the available scare resources in order to achieve the objective of profit maximization.

(2)             Most management and organization lack under-standing on the importance of cost volume profit analysis over other forms of techniques.

(3)             There is no practical application of cost volume profit analysis in the economy.

1.2     OBJECTIVES OF THE STUDY

          Profit planning and control are essential ingredients of a successful management. The efficiency of management is measured by the amount of profit in a given accounting year. The general objectives of this study therefore will be:

(1)             To find a way of making use of scarce resource in order to achieve profit maximization.

(2)             To highlight the importance poof using cost volume profit analysis over other forms of technique.

(3)             To identify the problems encountered in the economy that leads to lack of practical application of cost volume profit analysis.

(4)             To evaluate the extent to which the use of cost volume profit maximization of Nigerian Bottling Company plc.

1.3     RESEARCH QUESTIONS

1.       Does your organization use cost-volume profit analysis as a tool for profit planning and control?

2.       Apart from cost volume profit analysis, what other techniques do you employ in the profit planning and control?

3.       What problems do Nigerian Bottling company plc encounter in the profit planning and control?

4.       In what ways specifically has the application of cost volume profit analysis helped the organization to achieve efficiency and effectiveness?

1.4     STATEMENT OF HYPOTHESIS

(1)     H0: Cost volume profit analysis as a tool for profit planning and control is not used in Nigerian Bottling company plc.

H1: Cost volume profit analysis as a tool for profit planning and control is used in Nigerian Bottling Company plc.

(2)     H0: The application of cost volume profit analysis has not helped Nigerian Bottling Company plc to be efficient and effective in its operations.

          H1: The application of cost volume profit analysis has helped Nigerian Bottling company plc to be efficient and effective in its operations.

(3)     H0: Nigerian Bottling Company plc does not employ other techniques in profit planning and control apart from cost volume profit analysis.

          H1: Nigerian Bottling company plc employs other techniques in profit planning and control apart from cost volume profit analysis.

1.5     SIGNIFICANCE OF THE STUDY

          In a competitive world, the key factors are cost, price turnover and profit, and these are factors which no manager can ignore. Therefore, the significance of the study are as follow:

(1)             How the study of cost volume profit analysis would help the management of Nigerian Bottling company plc know which of the products results in large profit margin.

(2)             It is useful to students in schools since it will serve as a source of reference to them in the nearest future.

(3)             It is useful to the state since it is used by government in making decisions for improvement of the states.

(4)             It is useful to the economy as a whole since it is used by policy makers to maximize profit in the economy.

(5)             It is a basis for understanding contribution margin pricing, related short run decisions and transfer pricing.

1.6            SCOPE OF THE STUDY

This study is to analyze the need for cost volume profit analysis as a tool for profit planning and control in general but with particular reference to Nigerian Bottling company plc 9th mile. This is with the view of finding out how the company has been able to manage cost in order to maximize profit.

1.7     LIMITATION OF THE STUDY

          The study of cost volume profit analysis as a tool for profit planning and control is limited to Nigerian Bottling company plc 9th mile, Enugu state in carrying out this study, I am faced with a number of constraints some of which are as follows:

FINANCE: Inadequacies of funds affected expenses on distribution and collection of questionnaires to respondents and from respondents. Printing of questionnaires and other transport expenses in conducting the research.

TIME: There is need to observe lots of protocols in respect to levels of managements before the collection Suring that the primary data collected would be dependable to some extent, also the rationing of time so as to accommodate my other courses. Nevertheless, these constraints were taken care of and with limited errors and variances.

1.8     DEFINITION OF TERMS

          To enhance the usefulness of this research, proper understanding of these terms used herein will be of paramount importance, fro instance:

(1)             SHORT RUN: This is a period during which the quantity of at least one input is filled and the quantity of the other input can be varied.

(2)             TRANSFER PRICING: This is the rate of prices that are utilized when selling goods or services between divisions.

(3)             BREAKEVEN POINT: This is the level of operations at which a business revenue and expired costs (expense) are exactly equal.

(4)             SALE MIX: This can defined as the relative proportions in which a company’s products are sold. The idea is to achieve the combination or mix that will yield the greatest amount of profits.