A CASE STUDY OF LEVENTIS MOTORS LTD, LAGOS STATE
The study focused on examining the effectiveness of standard costing system in cost control within the motor industry by using Leventis Motors (Nig) Ltd as the case study. The study was motivated by the increase in operational costs of the company and its inability to maximise profitability from 2012 to 2017, regardless of having standard costing system under implementation specifically to control costs. Results showed that cost increases were largely as a result of inappropriate implementation of standard costing system and that they had triggered retrenchment of employees, stunted technological development, clientele loss, service pricing challenges and incurrence of losses. The results of the study would assist management in effective control of costs by means of standard costing system, which would enhance profitability maximisation for the company. The researcher recommends the company to establish a standards committee, encourage involvement of employees in standards setting and improve communication from standard setting to results evaluation so that it can maximise and maintain profitability.
The following chapter contains the background of study, the statement of the problem, main research objective, sub-objectives, justification of the study, delimitation of the study, limitation of the study, key definitions, abbreviations and a summary.
1.1 BACKGROUND OF STUDY
Leventis Motors (Nig) Ltd has been implementing standard costing since inception in 2005. This costing technique was mainly introduced in the company to assist management in cost control so as to maximise profitability. Quarterly performance appraisals, weekly operational cost reports and pricing of spare parts are activities done by the company based on set standards. These have been effected by the company’s management under the standard costing system to control costs (Business unit report, 2014). Frequent changes of economic conditions within the motor industry caused the company to regularly incur additional costs through frequent standards setting and variance analysis (Business unit report, 2014). The management accounts of 2012, 2013 and 2014 showed that the costs of the company increased regardless of a cost control technique being implemented by the company. As a result, the company is failing to maximise profitability.
The performance appraisals which were aimed at motivating employees, have not been successfully motivating employees. Due to the competitive nature of motor industry in Nigeria, setting the right standard for labour hours got to be a challenge. Customer complaints increased as a result of poor service delivery. To retain the competitive stamina, management planned on minimizing turnaround time (Business Plan, 2014). However, due to fixed available labour, the available technicians had to do rushed jobs which compromised service quality and resulted in additional costs of re-working defect jobs at zero charge. Management set ideal labour hour targets in the hope of addressing customer complaints. However, the technicians judged these targets unattainable, hence they got demotivated.
The company sets prices for spare parts by considering the cost that the motor spare parts were acquired and adding a mark-up of 35% (Sales report, 2013). The budgeted prices would be based on Toyota Nigeria motor spare parts prices since the company is a franchised dealer of Toyota Nigeria (Toyota Nigeria Dealers Network Report, 2014). Toyota Nigeria supplies Toyota motor spare parts to over ten franchised dealers in Nigeria, therefore, the motor repair parts required by the company would not be readily available in Toyota Nigeria’s stocks. In substitution, the company often had to search for those spare parts from the cheapest supplier so as to meet the standard price set whilst maintaining the 35% mark-up. Due to a vast number of suppliers, finding the right supplier took time which delayed job completion. Increased turnaround time pushed customers away, and this has resulted in lost sales. Telephone expenses of 2013 and 2014 increased due to additional telephone charges that incurred in communication with a list of suppliers in order to select the most efficient supplier to purchase spare parts from (SET Management accounts, 2013; 2014). These unplanned additional telephone charges increased the total operational costs which contributed to company losses incurred in 2013 and 2014, thereby affecting profitability maximisation.
1.2. STATEMENT OF PROBLEM
Leventis Motors (Nig)Ltd is failing to effectively control its costs through the effected standard costing system, which has resulted in the company failing to maximise profitability.
1.3. OBJECTIVE OF THE STUDY
This study seeks to investigate the effectiveness of standard costing technique in cost control of an entity in the motor industry so as to maximise profitability, and to suggest ways in which companies such as Leventis Motors (Nig) Ltd can implement to maintain profitability.
- To establish the relationship between standard costing and cost control.
- To identify challenges faced by the company in managing costs.
- To identify problems with standard costing implementation in the motor industry.
- To suggest ways in which management can effectively control costs.
- To recommend the costing techniques that management can implement to control costs when there is uncertainty in economic conditions.
1.4. RESEARCH QUESTIONS
- What is the relationship between standard costing and cost control?
- What are the difficulties faced by the company in managing its costs?
- What are the problems related to standard costing implementation in the motor industry?
- How can management effectively monitor costs?
- What are the costing techniques that management can implement to control costs when there are uncertain economic conditions?
1.5. JUSTIFICATION OF THE STUDY
To Leventis Motors (Nig)Ltd
This research will assist management in identifying ways of controlling costs and make informed reliable cost related decisions.
To Lagos State Unversity
This research paper will assist other students in further research and as a base of further argument.
To the researcher
The researcher will get more knowledge necessary for his future in the accounting career and the research findings will be useful to the researcher’s future business plan. This research is in partial fulfilment of the Bachelor Degree in Accounting at Lagos State Unversity.
1.6. SCOPE OF THE STUDY
- Geographical Scope
The research will be limited to Leventis Motors (Nig)Ltd which is located in Chiredzi. The researcher chose this company as it is the one that he was attached to for the year of work related learning.
- Time Scope
The research will be based on a period of three years (2012 to 2017) as this is the most recent period showing trends of the researcher’s research emphasis. Any information that the researcher would need from Leventis Motors (Nig)Ltd would be readily available for this period as well.
- Subject Scope
The study will be mainly centred on the effectiveness of standard costing in cost management within the motor industry so as to maximise business profitability.
1.7. LIMITATION OF THE STUDY
- Finances-The researcher does not have enough financial resources to carry out a full study of all companies in the motor industry. The researcher will attempt to make use of the available financial resources to carry out the research.
- Time– the period under review is three years and it might not be sufficient enough to enable the researcher to come up with a very comprehensive research paper. Nevertheless, the researcher will work for long hours on the research using both quantitative and qualitative research methods to come up with a comprehensive paper.
- Confidentiality– the research is limited to the information that Leventis Motors (Nig) Ltd can provide due to work pressure and confidentiality clauses. The researcher will follow company protocol to obtain enough relevant information to carry out the study, make appointments and acquire maximum assistance from management to inform employees of the benefit of the research to the company as a whole.
1.9 DEFINITION OF KEY TERMS
Profitability– it is whereby a company is earning profits from its operational activities.
Cost– It is a monetary value of the resources that have been sacrificed or must be sacrificed by the company in its operational activities to achieve profitability.
Control– This is the monitoring of occurrence of planned activities by management so that the budgeted targets are achieved.
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