COST-VOLUME-PROFIT ANALYSIS AS A MANAGEMENT TOOL FOR DECISION MAKING

CHAPTER ONE 

INTRODUCTION 

1.1     BACKGROUND OF THE STUDY

Orjih (2001), defined cost-volume-profit analysis as “specific way of presenting and studying the inter-relationship between costs, volumes and profits”.  According to him, it provides information to management in a most lucid and precise manner.  It establishes a relationship between revenues and costs with respect to volumes.  It indicates the level of sales at which costs and revenue are in equilibrium.  This equilibrium point is commonly known as Break even point.  The break-even point is the point of sales volume at which total revenues is equal to total costs.  It is a point of zero profit. According to Brown et al (1997), “some industries today are encountering problems raised by expansion through increased sales and the introduction of new products.  Many on the other hand are facing problem of contraction due to the introduction of substitute materials, products or reduced demand for their products.  Whichever is the case, it is vitally important that management should be in a clear position to plan for these changing levels of activity”. Apart from the problem of contraction and expansion, during the period of economic depression, a business may be faced with the alternative of closing down or selling its products at a price below the total cost.  Also profit planning and control is made more difficult by the changes in the general pattern of demand for the type of products offered and the action of competitors. In order to solve the problem created by the above situations, profit planning, cost control and decision making require an understanding of the characteristics of costs and their behaviour at different operating levels.  One of the most important tools developed by accountants to assist management in meeting these challenges is cost-volume-profit analysis.   

1.2  STATEMENT OF THE PROBLEM

This study entitled “cost-volume-profit analysis as a management tool for decision making” goes to suggest how the application of cost-volume-profit analysis has helped managers in making decisions of the firm to ensure its growth and survival. The challenges facing management are enormous particularly during this period of economic depression and they are as follows:

1.    Management is faced with the problem of how to make use of the available scarce resources in order to achieve the objective of profit maximization. 

2.    Advanced state of competition and rivalry where only the fittest enterprises survive. 

3.    Shortage of funds to buy the needed raw materials. 

4.    Low capacity utilization.   

1.3  OBJECTIVES OF THE STUDY

The research will be focused on cost-volume-profit analysis as a management tool for decision making (A case study of Nigerian Breweries Plc). The purpose of the study will be: 

(i)      To evaluate the extent to which the use of cost-volume-profit analysis has helped in achieving the profit maximization of Nigerian Breweries. 

(ii)     To identify problems encountered in the practical application of CVP analysis and suggest possible solutions. 

(iii)    To examine some other techniques that help in decision. 

(iv)    To highlight the superiority of using cost-volume-profit over other forms of techniques.   

1.4  SIGNIFICANCE OF THE STUDY

This study, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) will educate the entire public on how cost-volume-profit analysis is an effective tool applied by managers in decision making in their firms. This study will be of immense benefit to the following groups of persons: (a)  Business organizations especially Nigerian Breweries Plc. (b)  Cost Accountants and Financial analysts. (c)  Students of accountancy profession and other allied profession. (d)  Institute of management and technology (IMT) community. (e)  Researchers on related study. (f)   The general public.   

1.5  RESEARCH QUESTIONS

In this study, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) the following research questions come to mind:  They are: 

(i)    Is Cost-Volume-Profit analysis used as a management tool for decision making in Nigerian Breweries Plc? 

(ii)    Has the application of the cost-volume-profit analysis helped Nigerian Breweries to be efficient and effective in its operations?

 (iii)   What other technique apart from cost-volume-profit analysis does Nigerian Breweries employ in decision making? 

(iv)   Are these other techniques superior to cost-volume-profit analysis? 

(v)    What problems do Nigerian Breweries encounter in decision making?    

1.6   RESEARCH HYPOTHESIS

The hypothesis to attest to the questionnaire’s belief that cost-volume-profit analysis is a management tool for decision making can be tested as follows:

Ho:  Cost-volume-profit analysis is extensively applied in Nigerian Breweries Plc. 

H1: Cost-volume-profit analysis is not extensively applied in Nigerian Breweries Plc. 

Ho:  The application of cost-volume-profit analysis has helped the decision making and growth of the firm. 

H1:  The application of cost-volume-profit analysis has not helped the decision making and growth of the firm.   

1.7   SCOPE AND LIMITATION OF THE STUDY

This topic, “cost-volume-profit analysis as a management tool for decision making” (A case study of Nigerian Breweries Plc) should have intended to cover all the Nigerian Breweries located in different States of the Federation but the researcher intends to limit this topic to only 9th Mile Depot, Enugu State due to time constraints, distance and financial handicap.  The study of Nigerian Breweries 9th Mile Depot Enugu shall also serve other States of the Federation since the same techniques are applied in other depots.  Therefore, the researcher will rely heavily on the Nigerian Breweries 9th Mile Depot since they have adequate information data relevant to the study.   

1.8    DEFINITION OF TERMS

COST:  Nweze (2000) defined cost as “a measurement in monetary terms, of the amount of resources used for specific purpose. 

PROFIT PLANNING:  According to Orjih (2000), “profit planning refers to the operating decisions in the areas of pricing costs, volume of output and the firm’s selection of product line”. 

ECONOMIC DEPRESSION:  This is a period when there is little economic activity and many people are poor without jobs. 

COST CONTROL: Strahlem (1977) defined cost control as “the regulation, limitation or confinement of cost”. 

DECISION MAKING: Barfied et al (1994) defined decision making as “the process of choosing among the alternative solutions available to a course of action or a problem situation