COST VOLUME ANALYSIS FOR PROFIT PLANNING IN MANUFACTURING FIRMS

Abstract

This is set out to determine the application of cost volume profit analysis in business decision making the constraints experienced as well as the assessment of service coverage. In chapter one and two the decision makers on management is faced with a lot of problems but when these are addressed, the cost volume profit analysis are not adequately interpreted to management non availability of records and lack of proper knowledge of the users in a manufacturing firm. There is therefore need to embrace and identify the extent and nature of a accounting, services to the business segments in their decision makings especially on the areas of finance of the business. In chapter three, the researcher restricted himself to a reasonable scope, believed to give a representative of the case understudy. Primary & secondary data were used for data collection while interviews, personal observations and questionnaire distribution played a vital role to the regard percentages and chi-square were used to test the validity or otherwise used the hypothesis formulated

 CHAPTER ONE

INTRODUCTION

Background of the study

Due to industrialization in recent years, manufacturing firms have been increasing. They are more complex technologically and compete among each other for survival. It can also be that high growth rate occurs among them due to some levels of efficiency in production. The complexity and competition had been enhanced by increasing technology, use of expertise, computerization and raw material acquisition. There is also government economic growths cost control to mention a few. Among these control measures, cost control is significantly controlled by firm, since is managerial function which help to reduce cost in production and to again advantage over other first in the same industry. But some questions arise how can a firm be faced with control and management of cost decides on how many units to be employed? At what price will the products be disposed off? Cost volume profit analysis is a management tool used hen the problems of CVP implications arise in the firm, the problem includes making or buying decisions, product appraisal, adding or dropping decisions product planning and promotional mix, distribution channels and profit planning decisions.

Cost volume profit analysis is a valuable and reliable tool. If well applied, helps to alleviate the enumerated problems. The next questions that arises is do manufacturing firms apply cost volume profit analysis? If yes, how many CVP charts and ratios are plotted (or graphed) and computed in order to manage and control costs while increasing profits and market shares? How are this information relieved from appraised charts and ratio in the light of the basic assumption? How firms that acquired this information do used them in decision making?

STATEMENT OF THE PROBLEM

Considering the naira and its purchasing power, the researcher founds out that manufacturing firms are faced with heavy cost involvement during the process of manufacturing. The incurred cost has the implications in his overall productions which call to mind the cost problem. How can this cost problem be alleviated? The economy is not the same today as it has been in the past decade. The exchange rate of naira to foreign currencies and the price fixed for manufacturing goods and services greatly affect the profits to be made on the part of the manufacturers. If prices are not well fixed compared with the sale needed and cost incurred, it will pose a problem hence.  In the past decade, manufacturing firms had been increasing their volume of production. But today because of inflationary trends which prompted increase in cost of production negatively affected the volume of output. As such firms had been forced out of business while the continuing ones find it difficult to produce or maintain their format volume of production. The result is that the volume produced had reduced and reduce and this pose a volume problem that is capacity under utilization. The next issue: How can these three words cost; volume and profit be understood and inter mingled?

OBJECTIVE OF THE STUDY

The objectives of the study are;

To find out the reason why some firms do not use cost volume profit analysis, in planning and control of cost, and also in decision making.

To find out where some firms use cost-volume profit analysis, the basic assumptions are not implemented

To analyze the basic assumptions of CVP analysis to know their effect on firms especially those of the manufacturing sector.

To also make recommendations to the problems will be predicted.

RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: The applications of CVP graphs and ratios do not enhance profitability, productivity and efficiency decisions in manufacturing firms.

H1: The applications of CVP graphs and ratios do enhance profitability, productivity and efficiency decisions in manufacturing firms.

H02: The application of CVP analysis is not necessary in the effective control and management of costs.

H2: The application of CVP analysis is necessary in the effective control and management of costs.

SIGNIFICANCE OF THE STUDY

Due to the inherent problems in Nigeria, the CVP analysis has been directly and indirectly affected. It is with this in mind the researcher looks into the underlined consideration of CVP analysis in the manufacturing firms with particular reference to Obika Industry Limited Nkpologwu. In order to have the various approaches of the CVP touched.

SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers cost volume analysis for profit planning in manufacturing firms. The researcher encounters some constrain which limited the scope of the study;

a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

 1.7 DEFINITION OF TERMS

COST-VOLUME-PROFIT ANALYSIS (C.V.P): This is a systematic method of examining the relationship between changes in volumes (output) and changes in total sales revenue, expenses and net project. As the model of these relationships, it simplifies the real word conditions that a firm will face is it subject to a number of the understanding assumptions, limitations and a powerful tool for decision making.

COST VOLUME CHART (CVPC): A chart that helps in the enrichment of understanding of the inter-relationship of all factors affecting profit especially cost behaviour patterns over ranges of volume.

FIXED COST (FC): The cost that fixed in total amount over a period of production, but varies per unit of output with the level of production changes.

VARIABLE COST (VC): The cost that directly affects production by varying the level of production but constantly remains fixed per unit of output.

SEMI VARIABLE COST (SVC): The cost that have both fixed and variable cost features. It fluctuates as changes occur with relevant range but not in direct proportion to the changes.

CONTRIBUTION MARGIN (CM): It is the product profit of sales minus all variable costs.

BREAK-EVEN POINT (BEP): The point of activity where total cost are equal and the firm neither making profit nor loss.

MARGIN OF SAFETY (MOS): This is the excess of budgeted sales over the break even sales –volume

PROFIT/VOLUME RATIO (PVR): Is the relationship between contribution and sales value.

GROSS PROFIT RATIO (GPR): This is the commonest measure of profitability. The gross profit margin measures the efficiency with which the firm produces each unit. Its products by discounting all operating expenses

TIME-SERIES ANALYSIS (TSA): This approach does an evaluation of the firms operations over a period, the purpose being to evaluate the firm’s performance over this specific internal of time.

PRODUCTION DEPARTMENT (PD): A unit in which operations are performed on the part or product and whose costs are not further allocated.

NET PROFIT RATIO (NPR): The net profit margin measures the percentage of sales remaining after expenses including taxes have been deducted.