the enterprise, vol 6, no 2

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major cost clements, namely; labour, materials and overheads were identified in the ... procurement processes to involve better purchasing terms that will take advantage of discount ... costs and then taking action on any variances, ... raw materials were possible strategies adopted ... due to unfavorable market conditions or.
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COST MINIl\lIZAn ON ST RATEGIES - AN EM PIRICAL INVESTIGATION OF T HEIR IMPACT S O.N MANUFACTU RING FIRMS IN NIGE RIA DY LAWYER c. ODAM A ND IlAS SY O. EYO ADSTRACI' TIlis study examines cos t min imizat ion strate gies adop ted by manu facturin g firms in Ni geria. T he study is fundamentally pred icated on primary data obtained from questionnaire admi nistered on p rincipa l officers of Lever Broth ers (o ne o f the leading manufacturin g firms in Ni geria) who occupy strategic position at various cos t centers o f the company. Eight areas of cost that cut across the three ' major cos t clements, namel y; lab our, materials and overhea ds were id entified in the company. Data obtained from pr incip al officers occupying strategi c position s 31 these centres were used to evaluate the impact of the co mpany's various cos t minimi za tion strategies o n the unit cos t in such areas , From the find ings, o f thi s study, we conclude that manufacturing firm s in Ni geria are familiar with a number of COSt minimizatio n strategies that ;.IfC in vogue within thc system. COSl minimiza tion strategies such as variety redu ction, work-study, organization and method , value ana lysis and j ust-intime (lIT) are used by manufactur ing firms in Nigeria. But the choice of each strategy is contingent UII factors such as: fami liarity. cheap ness, effectiveness and recommendat ion by consu lta nts. Based on :hc findings of this study, we recommend that manufacturing firms in Nigeria should intensify their effort in backward integratio n strategies (0 enabl e them invest in the pro duction of their basic raw materials as a rel iabl e so urce of co st minim ization . And should structure their raw mat erial procurement processes to invo lve better p urchasing terms that will take advantage of discount concession. must lead to imp rovement of sharc hoi dcrs I INTRODUCTION wealth. Ma nufacturing is the tmnsfo rmatio n of materials into o the r good s thr ough the usc of The di fference bc tween cos t labour end factory facilities. Finns or minimization and strategy for minimizing cos t organizations invol ved in this process arc is esse ntial for effective assessm ent of the always confro nted with m:1I1Y con straints. resultant impac ts . Cost minimization embraces These constrnints arc referred to as costs. costs co ntrol an d reduction. Cost con trol Man ufacturi ng invo lves three maj or cleme nts implies the com pari son of actual and standard costs and then tak ing action on any va riances , of costs . These include; direct materials. direct . wo labour and factory overhead. the desire o f every whic h have ansen (Bally, 1970). manufacturing fin n is to minimize any aspect prominent examples of cos t control techni ques of these costs with out compro mising: standard . incl ude bu dgetary contra! and standard costin g. This need has beco me very compelling in view The se techniques have the b road obj ective o f o f the very shod dy stale of the Nigerian con taining co st within predetermined target, economy, TIle as tron omical rate of inflation, Cos ts reduc tion on the other hand goes beyond desp icab ly low exch ange ra te, low capaci ty containing cos ts, it act ua lly aims at reducing cost from pred elennined or accept ed standard. util ization and poor state of infrastructure in the It is concerned wit h the reduction of costs from country in recent times have impacted negat ively on the co st o f manufacturing in a previously accepted nann or sta ndard. While Nigeria. at the same time maintai nin g. the effective ness This scenario has fo rced manufacturing or performance of the product or service linus operating in the co untry to adopt one (Lucey, 1998) wh ile cost min imiza tion IS on ap proach or the other in order to mini mize cost. active, dynamic concept whi ch attempts to Since cost must be minimized 'a nd controlle d, extract more u-om the factors of produ ction without a loss of effectiveness. A stra tegy is for profitability to be imp\6ved (Guealcr, 1975) cos t minimization invo lves ad opt ion of tested S}110n}1lI0US with a system, method or device employed in orde r to achieve a given obj ective strategies to obtain the required objectives. Such obj ectives which aim ' at givin g the and strategy for cost minimi zation is the ' cus tomer a commensurate value for his money, method used in achieving cost - min imization' objecti ves. while reducing the cos ts of making and supplying the goods and servi ces (W ood, 197 4) Lawy er c . Obara Lec turer, Department of Accountancy River State University of Science and Technology Port Har coet t.

In order to survive in the .hard economy, plagued by high production costs , and prohibitive operating environments; many manufacturing firms in Nigeria adopted various strategies aimed at minimizing their costs. Some of these strategies are known to have fallen short of the required result. In this study we present the results of empirical investi gation of the impacts of cost minimization strategies on manufacturing firms operating in Nigeria, we use Lever Brothe rs Nigeria Pic as a case stu dy.

increase , sales volume expansion. and improving the product mix , these strategies arc often influenced by extraneous variables for instance, price increase may be difficult in a competitive marker or in a regulated eco no mv (where there is stri ct price co ntrol system as is common in developing countries). Also expansion in sales volume 'lot be attai nable in a stable or declin ing market. While improv ing product mix may be impaired due to unfav orabl e mark et conditions or produ ction capacity. Cos t minimization on the other hand does not 'depend on external factors (Wood, ' 1974). T hese arc actlla ll~· one major objective driving all firms and Ihat is profit. Two broad ways to aua inin g this objective arc expansion and minimizi ng annual costs. Th~ later is within tlt':; centre! of ~b: firn: ;!T.(! :-:::~: c be more dcpcndcoic. Co st minimization is ~ :.:r:.:::;;;i..l: .t. ':'11 constituencies associated ·.... itl;, :n:m :.: f~=:!::i::£ . As comp etitors, the low cost comparr has added advantage to comp ete oflcnsiv ly on the bas is of lower price in a market where price compe titio n thrive s. As customers, the low-co st company has partial margin pro fi prot non. As suppliers U1C tow -cos; ' !"OOl.:c- caa ee insulated from powerful suppl i rs. as .iiere ::.

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C ON CEPTUAL FRAMEWORK One of the longes t surviving manufacturing outfit in Nigeria is the Lever Brothers Nigeria Pic. The company was incorporated in I9 23. The company started its operations from the manu facturing of soaps based on loca palm oil. She had diversified and expanded its operations to the production nne marketing of persona l ' wash ' pro ducts such as toilet soaps, non -soapy detergents, foods and persona l products such as tootn paste, body creams, locat ions , body care and hair care produ cts. Like most other manufa cturing firms ill Nigeria, the company has ad op ted many strategies aim at its surviva l. Merge; was adop ted as ::: strategy fa: expansion tine. consoiication. in 1985, it merges with Lipton Nig! ! ~J7 · i ) . C : : ; , ; ~.l ! i il\'I~'! t ; ll ~'ll t

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N igeria cs a C:lS~ study. Our ;;,·,',:;;ti:;:oti:.i.: cover four ~ra~ichcs of lh~ eomi'~ny sited in '\ jl ;l;l :l,

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To have a focus for our investigation the following research questions were raised. ls there any significant difference in various elements of costs before and after embarking on cost minimization by manufacturing firms in Nigeria? Is there any difference between the theory and p ract ice of cost minimization strateg ies by manufacturing firms in N igeria? And the following null hypo theses were also tested ; . There is no significant difference in various element of cos ts before and after

years. Th e t statisnc s was used. The summary result is presented at append ix 2 From the results of the t test analysis. we discovered that the t value calculated of 4.71 at 14 degree of freedom , 2 tail test was greater than the critical val ue of I at 95 percent confident level. Based on th is result we reject the null hyp othesis of no si gni ficant ditTerent in various elements o f cost before and after

embarking on cost minimization manufacturing firms in Nigeria.

by

There is no ' significant difference the theory and practice of cost

Since the strate gies adopt ed by these finn s arc in line with the exi sting theories in the field, we con clude that there is no significan t ditTcrencc between the th eory and Practice of cost minimi zation strategies as appl ied by manufactu ring firms in Nigeria .

minimization strategies by manufacturing {inns in Nigeria . Questionnaire were adm in istered on eight (8) prin cipal officers in each of the four

CON C LU DI NG REMARKS From the findings of this study, we conclude that manufacturing firms in Nigeri a

embarking on cost minimization manufacturing finus in Nigeria. between

by

(4) branches of Lever Brothers. Out of 32 questionnaires administered , 25 were retumcd,

giving a return rate of 810/0, our time focus is 5 years. DATA ANAL YSIS This study is fund amentally pre d icated on primary data obt ained from questionnaire responses administer ed on p rincipal officers of the company. Eigh t major areas of cost, that cut across the three major cost clements, namely; Labour, Material and Overheads were identified in the company (See Appendix I) . Principal officers occup ying strategic positions

a

are familiar'with number of cost minimization strategies in vogue within the system. Cost minimization strategies, such as: variety reductio n, work-study, organiza tion and method , value analysis and j ust-in-time Oil) are used by manufactu rin g finns in Nigeria. Bnt the choice of each stra tegy is con tingent on factors such as: Familiarity, chea pness, and recommendation by effectiveness consultants.

Most manufacturing firms in Nigeria do not take advantage of discount concession in the purchase of raw material s as greater part of such purcha ses arc contract ed out to vendors.

at these centres were asked to conunent on the impa ct of cos t min imization strategies ap pl ied by the company in the specifi ed areas for the past 5 years. The respondents were simply asked to state if"such strateg ies in any way contributed to the reduction or otherwise of the unit cost in such arcais) . The responses were grou ped into two categories. Those tha t feel the strategies result in unit cost reduction, X, and those that reel they dOJ10t XI. A s tatistical test wa s conducted on these data , with a view to ¥eertaining if there is a mean diff erence between the prop ortion of those who feci implementation of. cost minimization strategies result in redu ction of unit 'cost and those that fccl o therwise, Our computational device is the statist ical package for social seienee-SPSS . The time frame is 5

do

Most manufacturing firms in Nigeria not have separate cost accounting

department. Cost sec tion is merged with thc finan ce ' and accounts department (FAD ). Qualified and experienced personnel man this

department with functions well segregated. ' . Despite this arrangement, costs of production operation, 'as well as unit sell ing price of the prod ucts are not determined ar bitrarily. Due to

the positive impact of cost minimization strategies in manufacturing firms in Nigeria, there exists a signifi cant difl ercncc in lab our, material and overhead co sts before and after

embarking on cost minimization strategies. RECOI\II\IENDATION

Based on the findings of this study, we rcconuncnd that manufacturing Hems in Nigeria should intensify their cfloi t in backward

LawyerC. Obara Lectu rer, Departm ent of Accountancy-River State Univ..crsity of Science and Technology POll Harcourt.

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integration strategy to enable them invest in the production of their basic raw materials as a reliable source of cost minimization. And should review the method of material procurement to include better purchasing terms that will pro vid e avenue for them ,10 take advantage of discount concession. There is need for manufacturing fmns in Ni geria to develop efficient and effective manageable labour force rather than mainta ining a -Iarge labour force that arc depri ved of basic allowances for the sake of minimizing costs, since such strategies have the potentials to breed uncommitted . workforce with its attendant costs. Man ufacturing firms should ad opt a centralized and specialized buyin g system to take advantage of trade and quality discounts to eliminate inflated pricesson supplied 'materials by vendors . f ina lly, manufacturing firms should maintain a system that places emphasis on responsibility acco unting to tech nique. TIle use 'JI" budgetary control and standard costing techniques arc of particular importance, And the system of analyzi ng the raw materials in the laboratory to ascertain their quality can aid the manufa cturing firms in N i geri~ to minimi ze the costs,

Manins, F. (198 1) ~Con!rollin g Labour Cos!" Ancho Press Ltd . Britain . Mayor, A. ( 198 8) Management lCAN Study Text C IMA:533

~ cqlUnting

WIENER, M. (1983) Accounung Conrrol Systems : A Behavioural and Technical Integration. - BeU J. ed., New York Wool, E.G. (1974) :Costing Matter Manages" Bus ines s Boo ks Ltd s. London-

for

REFE RENCES ~:::tt~·. COc;lIHI !"

I

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·· ~. !~ :1 :: ~ :nen t

M ac DCJn::uis

Standard

'ale ~ "iJns Ltd . London

Cole, G._':"'. ( ~ ~}9 1 ) :.'1:iI1Jgemcnt : Th eory and Practice, DP. Pub licatioas Fabrycky, \\' ..1 . Share, P.E . and Tc rgicrscn, P.E. (19R4) 6 np licci Oocrnt ions RCSC:lfC h nn e! r. l :-l n ~ !.! cm\? nt S ~ i cn C' ~ Prentice I I :& ~ 1 International Inc. Englewood Cliff s, NJ USA. Greater, l i.J. ( EO )) : Cost Control rof lhe

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Luccv T . (1998) rvb:1 :,: !.'cmcn l .A.ccct:!lti:H! DP l'u ~licr.tioll s Ltd ., Grund Union Indu strial Estale Unit G, Abbey Road London,NW I 07U L . Mnuce, R. (l 9SG) Advilnc"rCo,t Accoun lin!! Harper and Row. Lawye r C. Ob=.m Lectur er , Dc pan mcm

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APP ENDIX 1 EM PIRICAL ANALYSIS OF COST MINIMIZATION MANUFACTURING COMPANIES IN NIGERIA .

!minimization Areas of

cost in

i

Ii

AND

Number . of respondents who feel, cost minimization strategies do not result in reduction of unit cost

manufacturing

industry in Nigeria

ITS

No of respondents who . feel cost

rrumnnzanon

3

.

IN

II

strategies result in : reduction ofunit cost

Procurement of raw materials Taki ng advanta ge of p urchase discount

10

X2 15

15

10

Usc of economic order quantity model for procurem ent or

7

18

10

15

7

18

XI

2

IMPACTS

ra w materials

4

Effectiveness of thc III systems used checkin g the quantity and quality of

5

Frequency occurrence

purchase materials

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of unfavourable material I q ualitv variance

I I'

6

Inbuilt

5

20

7

strategy for preventi ng abnormal materials loss Adequacy of ' stan'

6

19

8

strength Effici ency system

of the use

checking

24

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AP PE ' DIX II SUMMARY RES ULT OF t T EST ANALYS IS Number Of Cases

Gro up I

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Group 2

,

Mean

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Stan da rd

8

7.625 0

8

17.37504.138

Deviat ion

Standa rd E r ror

4.13 8

1.463 104 63

Lawyer C. Obara Lecture r, Depart ment of AccOUhl:lIlcyRh'CIStaltUni\,ersity of Science and Technology Port

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Pooled Variance Estimate

IF I Value

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2 tail

Degree freedom

t

Probability

Value

of 2 tail Probability

of siRDificance

I I

!

Critical value of t at S percent level

1.00

,Source:

1.000

-4.7 1

14

0.00

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Lawyerc. O ~ Lec turer, Department of Accountancy River State University of Science nnd.Tcc lmology Port ~~~

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