Cost Volume Profit Analysis for Profit Planning in Manufacturing Firms
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Chapter one on Cost Volume Profit Analysis for Profit Planning in Manufacturing Firms
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 are 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 to make or buy decisions, product appraisal, add or drop 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 mange 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 do firms that acquired this information 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 have 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 STUDY
The aims and objectives of this study is 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. Again, where some firms use cost-volume profit analysis, the basic assumptions are not implemented. It is also the objective for the study to know why some firms who use cost volume profit analysis end up not combating cost implications problems.
In the objectives, also to analyze the basic assumptions of CVP analysis to know their effect on firms especially those of the manufacturing sector. It is by highlighting these that a way of making recommendations to the problems will be predicted.
RESEARCH HYPOTHESES
Hypothesis one
H0: The application of CVP analysis graphs and ratios by manufacturers in the control and management of costs.
Hypothesis Two
H1: The application of CVP analysis graphs and ratios enhance profitability, productivity and efficiency decisions in manufacturing firms.
H0: The applications of CVP graphs and ratios do not enhance profitability, productivity and efficiency decisions in manufacturing firms.
Hypothesis Three
H0: The application of CVP analysis is necessary in the effective control and management of costs.
H0: The application of CVP analysis is not necessary in the effective control and management of costs.
SIGNIFICANCE/SCOPE OF 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.
LIMITATIONS OF THE STUDY
It is due to finance that the researcher limits himself to the use of Obika Industry Ltd. In carrying out his project work, despite the numerous manufacturing firms all over the country. The distance between the researcher and the case company posed serious hitch to the smooth carrying out of this project. The time frame allocation to the writing of this project was so infinitesimal and hence little time was allocated to writing this project.
DEFINITIONS 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 remain 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 firms 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 has been deducted.
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