- BACKGROUND TO THE STUDY
A business objective is the starting point for any business organization to thrive and it provides direction for action. It is also a way of measuring the effectiveness or otherwise of the actions taken by the management of the organization. The main goal or objective of any business organization is to make and maximize profit while other secondary objectives include going concern, growth, corporate social responsibility, benefits to employees and so on.
The need to reduce costs is growing as more companies struggle with global competition and the faltering economy. But in the pressure to reduce costs, it is increasingly important to thoroughly evaluate their short- and long-term impact, as well as the direct and indirect repercussions. However, for adequate profit to be recorded from a business there is a need for adequate reduction of cost. Robert (2007) stated that a company with adequate cost structure possesses the higher chance of attaining its profit target.
Prices of goods, raw materials and services are gradually increasing day by day, and due to the fact that the sole aim of a businessman, producer or manufacturer is to make profit they end up making use of low quality materials for production so as to reduce cost of production and maximize profit.
Innes, John, Mitchell and Sinclair (2000) assert that the survival triplet today for most organisation focus rely majorly on how to manage product/service cost, quality, and performance. Potential customers continually, increase their demand for high quality and better performance products/services and at the same time, they want the price to be reasonably low. The shareholders demand also cannot be ignored, with respect to a required rate of return on their investment from the company. The challenge is being able to manufacture products or provide services within the acceptable cost strategies and techniques adopted. Innes, John, Mitchell and Sinclair (2000) affirmed that cost management has to be an ongoing and continuous improvement activity within the company so as to enhance profitability and survive.
In Nigeria business competitive environment, manufacturing companies are struggling to maintain profits and healthy bottom lines. Cost of production, fuel, raw material and human resources is rising each year. These developments have prompted the management of this organizations to source for Cost reduction ideas and methods. Those who have opted for focused cost reduction strategies should survive the times. Recently, economic recession challenges becomes more important to make cost reduction program a major initiative in manufacturing industry. Companies are finding it difficult to retain people and are laying-off employees which are unprecedented in recent history of industrial recession, most of whom have to develop their own cost reduction measures for savings without cutting jobs. Moreover, with the increase of competitors around, most of the producers have thought it wise to manufacture or package a quality product and also enhance their profit level. Cost reduction and profitability is the mainstay of every business entity and therefore represents the bottom line for every company. For a firm to be profitable, a clear and thorough understanding of all the factors that drive profit, as well as cost is very important (Adeleke, 2014).
Cost Reduction is a process, aims at lowering the unit cost of a product manufactured or service rendered without affecting its quality by using new and improved methods and techniques. It ascertains substitute ways to reduce the cost of a unit. It ensures savings in per unit cost and maximisation of profits of the organisation.
It may also be defined as the achievement of Real and Permanent Reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product. Cost reduction, should therefore, not be confused with cost saving and cost control.
The precarious situation of the economy requires every major participant in economic life be it private or public firms, policy makers in particular, to take immediate action towards creating stratrgies for reducing unnecessary upsurge cost in the organisation. However, these measures delays to occur. On the performance and efficiency level, the decision is at the discretion of the management or planning committee setup to find an everlasting solution to means of cutting cost in order to maximize organizational profitability and hence increase efficiency.
Cost reduction strategies has been equipping organizational managers and production cordinators with important information to take decision and deals with both constant timely and frequently changing production factors i.e. order received, order backlog, capacity utilization, and sales. Other analytical reports are prepared for decline in profitability, market share shrinkage, customer loyalty disruption towards the organization. In both cases, it is usually done through comparing actual results with the planned results or benchmarks.
Cost reduction strategies is renowned to be very useful management accounting techniques that extensively help organizations incorporate cost accounting data, financial and non-financial information. Knowing this information is essential for management to do their jobs, in the present day today, organizations need development and continual improvement in their performance for maintaining their activity and survival in the dynamic competitive environments.
STATEMENT OF PROBLEM
This study is confronted with the view of discovering whether organization especially manufacturing companies adopts certain cost reduction measures in their products marketing and promotion, as well as production processes, which ultimately have an impact on their performance, profitability, and cash flow analysis.
In recent years, the cost of products manufactured in Nigeria has been very expensive beyond the reach of common Nigerians. This cost challenges has made many products manufactured in the country unpatronized by the consumers, and as a result of that expires in the hands of the sellers. This cost challenges has made many products manufactured in the country unpatronized by the consumers, and as a result of that expires in the hands of the sellers. There is also a problem of poor inventory management which leads to overstocking thereby tying down the company‟s working capital. Another problem facing some or most of the manufacturing firm is the installation of improper plan to reduce cost of production so as to maximize profit, i.e. ( making use of low quality raw material).
Going by cost implication for manufacturing a particular product, most firms incur huge costs to ameliorate the effect of adverse environment and huge cost of production is expected to affect the profitability indexes of this organisations. According to Burns (2007) these profitability indexes include capital base, workforce, turnover, market shares and efficiency in production.
The problem of increase cost of production have forced the companies involved to make many adjustment which modification of product changes in the methods of production and even marketing and the discovering of new sources of financing production some company go as far as reducing the quality of raw material and up producing less quality producing which cannot help matters in the long run.
It is imperative to note that, in Nigerian context manufacturing firms currently are facing a lot of challenges, which affect performance and efficency. These lump sum challenges continue to constitute threats to the growth and survival of this level of businesses. It is apparent that most manufacturing firms who are major player in the manufacturing sector have gone into oblivion due to intolerable and unacceptable decadent forms of infrastructural developments (Oghojafor, 1998). The poor state of the country’s basic infrastructure has not been resolved and so it becomes difficult for small and medium scale enterprise to thrive. Basic enabling environment includes good roads, stable electricity; pipe borne water, communication facilities and security system.
Furthermore, the exorbitant cost of running business in Nigeria has necessitated the need to focus on cost reduction as a means of achieving both the primary and secondary objectives of being in business, which include maximisation of profit and shareholder value. Up till now, many companies do not see cost management as a serious issue. No wonder why they frequently complain of low returns to capital employed, the inability of this manufacturing firms to reduce cost incurred and attendant effect on profitability has forced some Nigerian firms to relocate their businesses to the neighboring countries, where they assume cost of running business will be relatively cheaper compared to what is happening in Nigeria.
Lastly, Manufacturing firms in Nigeria now operate within a turbulent business environment which has been characterized by high rate of inflation, intense competition by capacity utilization, depreciation and depreciation value of Naira, etc. As a result of the afore mentioned, many firms struggle to maintain satisfactory earnings in a situation where costs are rising but price increases are becoming more and more difficult to achieve, It therefore become a truism to state that three exist a problem in an organization where the cost method in operation is either not relevant or is not effectively applied to.
1.3. OBJECTIVES OF THE STUDY
During tough economic times such as the recent economic recession issues in Nigeira, many manufacturing firms are faced with the need to reduce costs to remain competitive, maintain profitability, or even to survive. And whereas it is necessary to respond to these needs with appropriate cost reduction measures.
The general objective of the study is to assess the effect of cost reduction strategies on the performance of manufacturing company in Ekiti State.
Other specific objectives are as follows;
- Determine how various cost reduction strategies can help to enhance the survival and profitability of this level of business.
- The accounting systems which are designed to reduce costs.
- Effect of adjustment in the cost of an organization exert on the profitability of a given company.
- Evaluates the nature of cost reduction technique and how it can be adopted to reduce operational costs of manufacturing firm.
- Identify the role of cost reduction techniques as an instrument for expressing company’s policy or programme .
- Identify the general pattern in the cost structure of manufacturing firms in Ekiti state.
- Determine the effect of cost component on the profit generating ability of manufacturing firms in Ekiti state.
- Investigate the relationship between element of production cost structure and the firm performance.
1.4. RESEARCH QUESTION
For emphasis on the study, the following research question can be used to throw more light on the study;
- What are the various cost reduction strategies can help to enhance the survival and profitability of this level of business?
- Is there any accounting systems designed to reduce costs in manufacturing firms?
- What effect does the adjustment in the cost of an organization exert on the profitability of a given company?
- The nature of cost reduction technique and how it can be adopted to reduce operational costs of manufacturing firm?
- What are the roles of cost reduction techniques as an instrument for expressing company’s policy or programme?
- What are the general patterns in the cost structure of manufacturing firms in Ekiti state?
- Is there any effect of cost component on the profit generating ability of manufacturing firms in Ekiti state?
- What are the relationship between element of production cost structure and the firm performance?
1.5 SIGNIFICANCE OF STUDY
Previous researchers have called for more studies to apply modern cost reduction tools and techniques in businesses that can affect operational performance and develop new strategies and procedures to achieve predetermined organizational objectives.
Although there have been substantial research efforts by different scholars in determining what seems to be the cost reduction strategy for manufacturing firms and the effect on the companies’ performance/reported profit, yet there is no universally accepted theory.
This study will have useful implications for theory and practice. Regarding the potential implications for theory, the study will expand the existing management accounting literature in two main ways. First the study will provide new empirical evidence on the use of cost reduction techniques. Second, the study will contribute an additional study in the new context of Nigerian manufacturing firms regarding what contingent factors affect the extent of cost reduction strategies uses.
This research work when completed will also be very useful to the business/ Organisations, as it will provide them with the requisite knowledge of management accounting techniques in making provision and interpretation of information required by management at all levels for formulating organizational policies, planning and good decision making.
Furthermore, The result of this research work is expected to widen the view held by potential managers and other corporate bodies, who have been in one way or the other perhaps, been have parochial view of the needs of cost control. It will be of great benefit to manufacturing and processing industry(s).
Also, it will be of assistance to the company management in their cost reduction activities as well as management accounting students in their research.
1.6. STATEMENT OF HYPOTHESIS
Hypothesis is “a speculation of the way the variables of study behaves” it is a guide method to be used in their analysis. The needs for such guides rise to the following hypothesis; and they were stated in null form
There are no significant relationship between the use of management accounting techniques and organizational performance.
H0: There is no significant impact of effective cost reduction measures on the growth and profitability of Nigerian manufacturing firms.
1.7. SCOPE OF THE STUDY
These research will reveal the essences of cost reduction in manufacturing firm, the cost structure of the sector, cost reduction measures adopted to minimize waste of resources and invariably the major procedures embarked to ensure that actual results are in line with the set standard; so that waste are measured and appropriate action taken to correct the activity.
The study will also envisage the nature of cost accounting in use in the organization by the management. It will also emphasize on the method of setting standard if the firm adheres strictly to its standard and application of deviations analyzed and reported.
The studies will also evaluate various cost component adopted in manufacturing industry, as well as modern cost management techniques for reducing organizational production cost to the barest minimum in order to meet production target.
This research will reveal the essences of cost cost reduction strategies in manufacturing firm in Ekiti State, Nigeria.
1.8. LIMITATION OF THE STUDY
Limitations envisage in this research work are:
- Uncooperative attitude of the staff in the organisation: this is a major limitation which increase the time spent in completing the research work.
- Monetary constraints: this factors serves as a deficiency for the research work, and as a result of low financial capability, it was not enough to give us desired results.
- Inadequacy of Reference Material: In the process of carrying out this research work, the most nagging problem facing the study is how to obtain reference materials. The time to carry out the research is short and insufficient, since it is done alongside with some other courses to contend with so as to present a good result.
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