COST-VOLUME-PROFIT ANALYSIS AS A TOOL FOR PROFIT PLANNING AND CONTROL:
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In the recent times some industries are facing problems raised by expansion through increased sales and the introduction of varieties of product. Many on the other hand are facing problems of contraction due to the introduction of substitute materials and products or reduces demand for products whichever is the case, but it is important that management should be in a better position to plan for these changing level of activities.
Apart from the problem of contraction and expansion during the period of economic depression/doom respectively a business may be faced with the alternative of expanding/closing down or selling its products at a price below the total lost. Also profit planning and control is made more difficult by the changes of products and the action of competitors.
In order to solve the problems created by the above situations, profit planning, cost control and estimation, and decision making require an understanding of the characteristics of cost and their behaviour at different operating level.
One of the most important tools developed by accountants to assist management in meeting the challenges is the cost-volume-profit analysis.
According to Pandey (1990:138) the analytical technique used to study the behaviour of profit in response to changes in volume, cost and prices is called “the cost-volume-profit analysis”. It is a device used in determining the usefulness of profit planning process of the firm.
According to Harper (1982:130), cost is defined mathematically as “cost equals usage multiple by price, which means that cost is also analyzed while studying the behavour of profit in response to changes in volume and prices.
According to Horngren Foster and Dala (1997) cost estimation is the attempt to measure the past cost relationships between the total costs and the drivers of those cost. Infact, the entire field of profit planning has become associated with the cost-volume-profit relationship.
At the completion of this Study, the contribution made by the cost-volume profit analysis for the efficient profit planning and control in Nigerian Bottling company will be made known.
1.2 STATEMENT OF THE PROBLEM
The challenges facing management are many particularly during this period of economic depression characterized by liquidation of companies, low capacity utilization, shortage of foreign exchange to buy the needed raw materials and the advance of competition where only the fittest enterprise survive. Management is faced with the problems of on how to make use of available scarce resources in order to achieve the objectives of the profit maximization.
1.3 OBJECTIVES OF THE STUDY
1. To evaluate the extent to which the use of cost-volume-profit technique has helped in achieving the profit maximization of Nigerian Bottling Company Plc.
2. To identify the problems encountered in the practical application of CVP analysis and suggest possible solutions.
3. To examine some other techniques that can help in the profit planning and control.
4. To identify the practical cost estimation involved in application of CVP in Nigeria Bottling company
5. To highlight the importance of using cost-volume-profit over other firms or Enterprises
1.4 RESEARCH QUESTIONS
1. How would cost-volume-profit analysis help the management of Nigerian Bottling Company to know which of the products to produce and achieve profit margin?
2. Will it afford the management the opportunity to know the changes in cost behaviour?
3. What are the likely affects of changes in the mix of products procedure and sold?
4. What are the likely effects of plant expansion and contraction?
1.5 HYPOTHESIS
The basic assumption of this research work is the application of cost-volume-profit analysis as a technique for profit planning and control in manufacturing company.
Hypothesis I
Ho: The introduction of cost-volume-profit analysis has significant effect on profit of manufacturing company.
Hi: The introduction of cost-volume-profit analysis has no significant effect on profit of manufacturing company.
Hypothesis II
Ho: The application of cost-volume-profit analysis has helped Nigerian Bottling company to be efficient and effective in its operations.
Hi: The application of cost-volume-profit analysis has not helped Nigerian Bottling company to be efficient and effective in its operations.
Hypothes
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