CHAPTER ONE
INTRODUCTION
1.1. 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. Though other objectives are also considered very important as listed above, but profit maximization is usually the ultimate because it maximizes the shareholders wealth which is the ultimate aim of investing in a business. People will naturally prefer to invest in a highly profitable business. Therefore, in the long run only the profit maximizers survive in the business environment. However, for adequate profit to be recorded from a business there is a need for adequate control 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. 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 control/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 control is an important and has always been an important issue but perhaps most important in today’s unpredictable market with few exceptions, at no other time in history has the business market been more dynamic. Unlike the large scale enterprises, the small and medium scale enterprises (SMES) have been starve by financial needs, poor implementation and monitoring of projects, time and cost overrun, nonpayment of loans and harsh economic conditions. (Adam, 2005). Moreover, one of the most important traits for business success in a recession economy in especially Nigeria is that more and more manufacturing companies had been chased out of market and are thus using cost control and cost reduction as a competitive weapon.
However, a business enterprise must survive, grow, and prosper. Cost Control and Cost Reduction both are the activities necessary for ensuring that these objectives are fulfilled. With the current Economy situation of a developing economy such as Nigeria, there is now a cut throat competition from various business concerns of the countries. As a result there is now a race to secure a place for survival. This has increased the importance of Cost Control and Cost Reduction. Hence it is required to study the different tools and techniques used for the Cost Control and Cost Reduction. For the same we need to start with understanding deeply the concept of cost. Once we understand the meaning of cost, its controllability, main areas where cost arises, then we can think of how to control or reduce the cost. We can classify the cost according to their nature, behavior then we can easily know the cost which can be controlled or reduced.