COST-VOLUME-PROFIT ANALYSIS AS A MANAGEMENT TOOL FOR DECISION MAKING
A CASE STUDY OF NIGERIAN BREWERIES PLC
This research investigation is focused on the use of Cost-Volume-Profit analysis as a Management tool for decision making using Nigerian Breweries Plc as a case study. Cost-Volume-Profit (CVP) analysis narrowly called break-even analysis, is the application of marginal costing and seeks to study the relationship between costs, volume and profits at differing activity levels and can be a useful guide for short-term planning and decision making. There are series of relationship between costs, volume of production and profit. An understanding of these relationship are useful to management. Cost-volume-profit relationship as a decision making device that considers the inherent relationship between cost, volume of production and the profit that is made. This research study is divided into five chapters and is summarized as the analysis and presentation of data which can be observed that the result shown as portrayed by the various analysis and test of hypothesis goes to buttress two arrangement which form the basis of this research work and also planning the profitability of the firm, which investigate the relationship that subsists between cost and prices of goods and address itself to the relationship of price to costs. While the management must minimize cost and maximize prices so as to make profit which is the goal of management. In recommendations the adequate cost control, the objectives or goals of the organization should be made know to the workers and top management of the brewery must display their total commitment to the success of the brewery.
TABLE OF CONTENTS
Title page ii
Approval page iii
Certification page viii
Table of contents ix
1.1 Background of study 1
1.2 Statement of the problem 3
1.3 Objectives of the study 4
1.4 Research Questions 5
1.5 Research Hypothesis 6
1.6 Scope of the study 7
1.7 Limitation of the study 7
1.8 Significance of the study 8
1.9 Definition of terms 9
Review Related Literature
2.1 An Overview of Cost-Volume-Profit Analysis 12
2.2 Cost-Volume-Profit Assumption 14
2.3 Cost-Volume-Profit Limitations 17
2.4 Break-Even Analysis A Traditional View of the
Cost-Volume-Profit Relation 18
2.5 Graphical Approach to break-even Analysis 20
2.6 Formular method of finding break point 23
2.7 The multi- product cost-volume-profit analysis 24
2.8 Decision making function 26
2.9 Other tools for decision making and control 28
Research design and methodology
3.1 Research design 42
3.2 Sources of data 43
3.3 Population and sample size determination 44
3.4 Method of data Investigation 46
Data Presentation, Analysis and Interpretation
4.1 Preliminary information 48
4.2 Data analysis 48
4.3 Testing of hypothesis 54
4.4 Interpretation of Result 64
Summary of Findings, Conclusions and Recommendations
5.1 Summary of findings 66
5.2 Conclusions 68
5.3 Recommendations 68
1.1 BACKGROUND OF THE STUDY:
Cost-volume-profit analysis can be defined in so many ways. Firstly, cost can be defined as an amount of money given up in exchange for something else, usually goods and services. It is the amount that has to be paid or given up in order to get or obtain something. In business, cost is usually a monetary valuation of effort, material, resources, time and utilities consumed, risks incurred and opportunity forgone in production and delivery of a goods or services.
Cost-volume-profit analysis is a process of determining the breakeven profit of cost and volume of goods which can be useful for managers making short-term economic decisions and also for general educational purposes. It is also relationship between cost volume of activities and the effect of the relationship on profit. It is a tools that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.
Orjih (2001), defined cost-volume-profit analysis as “specific way of presenting and studying the inter-relationship between costs, volumes and profits”. According to him, it provides information to management in a most lucid and precise manner. It establishes a relationship between revenues and costs with respect to volumes. It indicates the level of sales at which costs and revenue are in equilibrium. This equilibrium point is commonly known as Break even point. The break-even point is the point of sales volume at which total revenues is equal to total costs. It is a point of zero profit.
According to Brown et al (1997), “some industries today are encountering problems raised by expansion through increased sales and the introduction of new products. Many on the other hand are facing problem of contraction due to the introduction of substitute materials, products or reduced demand for their products. Whichever is the case, it is vitally important that management should be in a clear position to plan for these changing levels of activity”.
Apart from the problem of contraction and expansion, during the period of economic depression, a business may be faced with the alternative of closing down or selling its products at a price below the total cost. Also profit planning and control is made more difficult by the changes in the general pattern of demand for the type of products offered and the action of competitors.
In order to solve the problem created by the above situations, profit planning, cost control and decision making require an understanding of the characteristics of costs and their behaviour at different operating levels. One of the most important tools developed by accountants to assist management in meeting these challenges is cost-volume-profit analysis.
1.2 STATEMENT OF THE PROBLEM:
This study entitled “cost-volume-profit analysis as a management tool for decision making” goes to suggest how the application of cost-volume-profit analysis has helped managers in making decisions of the firm to ensure its growth and survival.
The challenges facing management are enormous particularly during this period of economic depression and they are as follows:
1. Management is faced with the problem of how to make use of the available scarce resources in order to achieve the objective of profit maximization.
2. Advanced state of competition and rivalry where only the fittest enterprises survive.
3. Shortage of funds to buy the needed raw materials.
4. Low capacity utilization.
1.3 OBJECTIVES OF THE STUDY:
The research will be focused on cost-volume-profit analysis as a management tool for decision making (A case study of Nigerian Breweries Plc).
The purpose of the study will be:
(i) To evaluate the extent in which the cost-volume-profit analysis is applied in Nigerian Breweries Plc.
(j) To identify problems encountered in the practical application of CVP analysis and suggest possible solutions.
(iii) To examine some other techniques that help in decision.
(iv) To highlight the superiority of using cost-volume-profit over other forms of techniques.
1.4 RESEARCH QUESTIONS:
In this study, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) the following research questions come to mind: They are:
(i) Is Cost-Volume-Profit analysis extensively applied in Nigerian Breweries Plc?
(ii) Has the application of the cost-volume-profit analysis helped Nigerian Breweries to be efficient and effective in its operations?
(iii) What other technique apart from cost-volume-profit analysis does Nigerian Breweries employ in decision making?
(iv) Are these other techniques superior to cost-volume-profit analysis?
1.5 RESEARCH HYPOTHESIS:
The hypothesis to attest to the questionnaire’s belief that cost-volume-profit analysis is a management tool for decision making can be tested as follows:
Ho: Cost-volume-profit analysis is not extensively applied in Nigerian Breweries Plc.
H1: Cost-volume-profit analysis is extensively applied in Nigerian Breweries Plc.
Ho: The application of cost-volume-profit analysis has not helped the decision making and growth of the firm.
H1: The application of cost-volume-profit analysis has helped the decision making and growth of the firm.
Ho: Nigeria breweries Plc does employ other techniques in decision making.
H1: Nigeria breweries Plc does not employ other techniques in decision making.
Ho: Those techniques alternative to cost volume profit analysis is superior to cost volume profit analysis.
H1: Those techniques alternative to cost volume profit analysis is not superior to cost volume profit analysis.
1.6 SCOPE OF THE STUDY
This topic, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) located at 9th mile depot Enugu state. The study of Nigerian Breweries9th Mile Depot Enugu shall also serve other States of the Federation since the some techniques are applied in other Depot.
1.7 LIMITATION OF THE STUDY
The researcher intends to limit this topic to only 9th Mile Depot Enugu State due to time constraints, distance and financial handicap. The research effort was faced with various obstacles also factors that limit the scope of this work are:
1. Time: The limit set for the execution of the research work was too short to allow for a detailed study and as such the research could not visit as many places as she intend to.
2. Finance: This factor tried to jeopardize the success of this work due to poor funding; the project could not be quickly executed.
3. Ignorance and indifference: Ignorance and indifference are other factors that militated against the success of this study. As some of the respondents were either short of knowledge of the subject matter or are simply unwilling to supply any information in the questionnaire.
1.8 SIGNIFICANCE OF THE STUDY:
This study “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) will educate the entire public on how cost-volume-profit analysis is an effective tool applied by managers in decision making in their firms.
This study will be of immense benefit to the following groups of persons:
(a) Business organizations especially Nigerian Breweries Plc.
(b) Cost Accountants and Financial analysts.
(c) Students of accountancy profession and other allied profession.
(d) Enugu State University of Science and Technology (ESUT) community.
(e) Researchers on related study.
(f) The general public.