CHAPTER ONE
INTRODUCTION
Cost volume
profit analysis is a distinct or unique discipline in the study of management.
The cost volume profit has various application in industries from profit
planning, formulation of marketing plans as well as decision making on volume.
In decision making, it must be
understood that cost volume profit is an important tool in short term planning.
It should be ascertained that the relationships that exist between the costs of
carrying out a business, the revenue generated from such business as well as
the sales of a firm. This is important because in the simplest form it is the
cost definition of profit.
The cost volume profit analysis is vital
to marketer as it guides in the formulation of plans and control. The treatment
of break even point allows the market to know the cost revenue behaviors of the
firm, while planning allows management of an organization to minimize risk and
uncertainty.
In the study of cost volume profit, the
technique used is called break-even analysis, it is concerned with the study of
revenue cost in relation to sales volume and particularly the level of
activities that produces neither profit nor loss, where revenue equals to cost
is the break even point.
The break even point can only be
achieved when there is a decision involving price, volume and cost that can be
split into two classifications.
The cost volume profit relationship is
needed because it represents what profit decision can be made. The company
decision on price and output attempts to produce the goods efficiently. If the
planning process is effective and efficiently utilized, a profit may result.
1.1
BACKGROUND
TO THE STUDY
Concerned has
been on cost even since the existence of money replaced by trade by barter.
It was the
concentration of manufacturing facilities into factories which gave impetus
into the development recognizable cost system.
The early
developments were almost entirely related to manufacturing industries. The
analysis is used in different prostates i.e. hospital, transport undertaking,
local authority’s offices, banks as well as manufacturing companies.
It was realized that the information
from financial accounting was insufficient for the numerous decision by the
management. Due to this inadequacy, the development of cost accounting of which
cost volume profit analysis was used as a means of decision taking.
History had it that there were seven
factors which were responsible for this development among which are the
increase in industrial activities, the production of war equipment in a
contract based on cost plus policy which were known as time and line contract
in position of price control by government and competition.
History also had it that this method was
use before and during the First World War and to a lessee’s extent during the Second
World War. It was used frequently in building trade even in U.S.A at that time
and frequently used in modern times.
Those entire factors combine to create a
necessity to determine and analyze cost supported by accurate facts and figures
to ensure that cost did not go beyond marketing price or contract price.
During the year,
fundamental principle was divided for costing before setting up of a cost
accounting system. Therefore, some preliminary investigation has to be made to
stand in form of principle to guide management in setting up the system.
These principles
are:
–
It must be designed to
suit the business
–
The cost of the system
must be considered in relative to the scope of the business and the benefit to
be obtained.
–
The requirement of the
management and laying out of the factory should be considered
–
The method of storing
raw materials and of enumerates labour whether by hours or pieces of work or by
the combination of the two must also be considered.
–
The personalities of
the key personnel and the capacity of the office staff should also be
considered.
1.2
STATEMENT
OF PROBLEM OF THE STUDY
The
main concern of this study or problem of this study is to view the impact or
application of cost volume profit analysis method of a company’s product in the
market it served. Basically the main issue is to know the extent in which cost
volume profit analysis effort has led to increase in accountability aspect and
profitability level of Nigeria breweries plc Ibadan.
This research work is embarked upon to
carry out a critical appraisal and evaluating a current level at which cost
volume profit analysis has changed the face of Nigeria breweries plc in terms
of their business decision compared to what the organization is practicing before
the advent of cost profit analysis as producer of consumable goods in Nigeria
market.
1.3
AIMS
OBJECTIVES OF THE STUDY
Specifically,
the aim of this study is to know or examine the application of cost volume
profit analysis in taking business decision. To achieve this aim the following
objectives shall be proved:
– To examine the impact or application of
cost volume profit analysis method of a company’s product in the market it
served
–
To find out the extent
in which cost volume profit analysis effort has led to increase in
accountability aspect and profitability level of Nigeria breweries plc lbadan.
–
Also to examine the
appraisal and evaluate a current level at which cost volume profit analysis has
changed the face of Nigeria breweries plc in term of their business decision
compared to what the organization is practicing before.
–
To also examine the
adventure of cost profit analysis as producer of consumable goods in Nigeria
market.
1.4
SIGNIFICANCE
OF THE STUDY
The significance
of the study is to identify analyze and make recommendation on the application
of cost volume profit analysis in taking business decision
The significance to Nigeria breweries
plc is to be the first beneficiary to the recommendation given after the
research.
The significance of the study to the
research is to widen the knowledge of the researcher on the subject matter
which is application of cost profit volume analysis in taking business decision,
also to educate the researcher on application of cost profit volume analysis in
taking business decision.
Finally, the significance of the study
to the society at large is for reference purpose more so, for reading purpose
for people that find it interesting.
In addition, estimation and application
of sales volume is necessary to earn a normal profit, plans can be laid in the
areas of marketing, purchasing, production and financing,
1.5
SCOPE
OF THE STUDY
The
study of cost volume profit centers the usefulness and application of the
accounting concept i.e. C.V.P cash tool for management in making business
decision, and focus on how to calculate the cost volume profit analysis,
computations of the C.V.P analysis as well as its basic principles. And not
exempt the assumption behind limitations and the uses of the concept.
Finally a case study of the Nigeria
brewery plc lbadan would be investigated under the concept of C.V.P analysis.
1.6
LIMITATIONS
CONSTRAINTS OF THE STUDY
This
study has been hindered by a lot of problems, also the effectiveness of
carrying out this research is hindered by the following factors.
A.
Poor
response: – some staff of the company who are
in adequate position to give adequate information declined in doing this. They
claimed it is due to organization set up and personal perception, a side the
fact that it’s meant for public consumption.
But
personal observations are being carried out and consultation was also made on
this study for broad analysis and for easy understanding.
B.
Claim
of confidentiality: – in case where the
staff agreed to respond to questions thrown to them, the information and
factors supplied were not adequate. This is as result of confidentiality
claimed by the personnel.
But
promise were made to keep the investigation given as secret before they were to
supply little information
C.
Non-
availability of data: – this is another hindrance
to the study. The data necessary for the study was not fully supplied and
available, its validity is another problem.
But
the sources of data for this project work were gathered mostly from textbooks,
journals, library and secondary data were also adopted.
D.
Time
and money constraint: – This project work
requires time and money which are not available as a student; there is limit to
the sources of income available to researcher.
But
money was sourced from other means like borrowing and gifts from relatives to
complete the research work. Also, one or two days was left out for the research
work.