Cost-Volume-Profit Analysis As A Management Tool For Decision Making

(A Case Study Of Nigerian Breweries Plc)

5 Chapters
|
77 Pages
|
9,381 Words

Cost-Volume-Profit (CVP) analysis is a valuable management tool for decision-making that aids businesses in understanding the relationships between costs, volume, and profits. By examining the impact of changes in sales volume, selling price, variable costs, and fixed costs on a company’s profitability, CVP analysis provides valuable insights for strategic planning. This tool helps management make informed decisions related to pricing strategies, production levels, and overall business operations. CVP analysis is particularly useful for setting sales targets, determining break-even points, and evaluating the potential impact of different business scenarios. It enables organizations to assess the financial implications of various decisions and optimize their overall performance, contributing to more effective and informed decision-making in the dynamic business environment.

PROPOSAL

The research investigation will be focused on the use of cost-volume-profit analysis as a management tool for decision making using Nigerian Breweries Plc as a case study.
Cost-Volume-Profit (CVP) analysis narrowly called break-even analysis, is the application of marginal costing and seeks to study the relationship between costs, volume and profits at differing activity levels and can be a useful guide for short-term planning and decision making.
There are series of relationship between costs, volume of production and profit. An understanding of these relationship are useful to management. Cost-volume-profit relationship as a decision making device that considers the inherent relationship between cost, volume of production and the profit that is made.
This research study is divided into five chapters. Chapter one is introduction which includes background of the study, statement of the problem, objectives of the study, significance of the study, research questions, hypothesis, scope and limitation of the study and definition of terms.
Chapter two deals with review of related literatures on cost-volume-profit analysis as a management tool for decision making. Chapter three deals with research design and methodology. Chapter four involves presentation, analysis and interpretation of data and finally chapter five will entail summary of findings, conclusion and recommendations as well as Bibliography.

ABSTRACT

This research investigation is focused on the use of Cost-Volume-Profit analysis as a Management tool for decision making using Nigerian Breweries Plc as a case study.
Cost-Volume-Profit (CVP) analysis narrowly called break-even analysis, is the application of marginal costing and seeks to study the relationship between costs, volume and profits at differing activity levels and can be a useful guide for short-term planning and decision making.
There are series of relationship between costs, volume of production and profit. An understanding of these relationship are useful to management. Cost-volume-profit relationship as a decision making device that considers the inherent relationship between cost, volume of production and the profit that is made.
This research study is divided into five chapters. Chapter one is introduction which includes background of the study, statement of the problem, objectives of the study, significance of the study, research questions, hypothesis, scope and limitation of the study and definition of terms.
Chapter two deals with review of related literatures on cost-volume-profit analysis as a management tool for decision making.
Chapter three deals with research design and methodology.
Chapter four involves presentation, analysis and interpretation of data.
Finally chapter five is summary of findings, conclusion and recommendations.

TABLE OF CONTENT

Title page
Dedication
Acknowledgement
Abstract
Table of contents

CHAPTER ONE
1.0 Introduction
1.1 Background of study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Significance of the study
1.5 Research Questions
1.6 Research Hypothesis
1.7 Scope and Limitation of the study
1.8 Definition of terms

CHAPTER TWO
2.0 Literature Review
2.1 An Overview of Cost-Volume-Profit Analysis
2.2 Cost-Volume-Profit Limitations
2.3 Break-Even Analysis A Traditional View of the Cost-Volume-Profit Relation
2.4 Graphical Approach to break-even Analysis
2.5 Formular method of finding break point
2.6 The multi- product cost-volume-profit analysis
2.7 Decision making function
2.8 Other tools for decision making and control

CHAPTER THREE:
3.0 Research design and methodology
3.1 Sources of data
3.2 Primary sources of data
3.2.1 Personal/Oral interview
3.2.2 Questionnaire method
3.3 Secondary sources of data
3.4 Population and sample size determination
3.5 Method of data collection
3.6 Method of validating the instrument
3.7 Method of data analysis

CHAPTER FOUR:
4.0 Data Presentation, Analysis and Interpretation
4.1 Preliminary information
4.2 Data analysis
4.3 Testing and interpretation of hypothesis

CHAPTER FIVE
5.0 Summary of Findings, Conclusions and Recommendations
5.1 Summary of findings
5.2 Conclusions
5.3 Recommendations
Bibliography
Questionnaire

CHAPTER ONE

1.0 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”.
ECONOMIXC 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.

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Cost-Volume-Profit Analysis As A Management Tool For Decision Making:

Cost-Volume-Profit (CVP) analysis is a valuable management tool for decision-making in businesses. It helps organizations understand the relationships between costs, sales volume, and profit, enabling them to make informed decisions about pricing, production levels, and overall business strategy. Here’s a closer look at how Cost-Volume-Profit analysis is used as a management tool for decision-making:

  1. Determining Break-Even Point: Cost-Volume-Profit analysis helps businesses calculate their break-even point, which is the level of sales at which total revenue equals total costs, resulting in zero profit. This information is crucial because it indicates the minimum level of sales needed to cover all fixed and variable costs. Knowing the break-even point helps in setting sales targets and pricing strategies.
  2. Setting Profit Targets: Beyond the break-even point, Cost-Volume-Profit analysis helps in setting profit targets. By understanding the contribution margin (the difference between selling price and variable cost per unit), a business can determine how many units need to be sold to achieve a desired profit level. This is instrumental in goal-setting and budgeting.
  3. Pricing Strategies: Cost-Volume-Profit analysis aids in pricing decisions. Businesses can assess the impact of different price levels on their profitability. By understanding how changes in price affect contribution margin and sales volume, they can make informed pricing decisions to maximize profit.
  4. Product Mix Decisions: For businesses offering multiple products or services, Cost-Volume-Profit analysis helps in deciding which products or services to emphasize. It helps identify the most profitable products and guides resource allocation accordingly.
  5. Cost Control: Cost-Volume-Profit analysis highlights the distinction between fixed and variable costs. This knowledge is valuable for cost control efforts. By managing variable costs effectively, businesses can improve their contribution margin and overall profitability.
  6. Capital Budgeting: When considering investments in new projects or equipment, Cost-Volume-Profit analysis can be used to assess the potential return on investment. By estimating sales volumes, variable costs, and contribution margins, it provides insights into the project’s profitability and feasibility.
  7. Scenario Analysis: Businesses can use Cost-Volume-Profit analysis for scenario planning. By running different scenarios, such as best-case and worst-case sales volume projections, they can assess the impact on profits and make contingency plans.
  8. Risk Assessment: Cost-Volume-Profit analysis helps identify the level of risk associated with various business decisions. It can highlight situations where a small change in sales volume could significantly affect profitability, allowing businesses to mitigate risks accordingly.
  9. Sensitivity Analysis: Sensitivity analysis involves examining how changes in key variables (e.g., selling price, variable costs) impact the overall results. This can help businesses understand which factors are most critical to their profitability and make more informed decisions.
  10. Performance Evaluation: Cost-Volume-Profit analysis provides a basis for evaluating the performance of different products, departments, or business segments. By comparing actual results to Cost-Volume-Profit projections, businesses can identify areas that require attention and improvement.

In summary, Cost-Volume-Profit analysis is a versatile management tool that aids in a wide range of decision-making processes within an organization. It provides insights into cost structures, pricing strategies, break-even points, and profitability, enabling businesses to make informed choices that can lead to improved financial performance and long-term success.