Cost Volume Profit Analysis For Profit Planning In Manufacturing Firms
(A Case Study Of Obika Industry Nigeria Limited Nkpologwu Anambra State)
Cost-Volume-Profit (CVP) analysis is a crucial tool for profit planning in manufacturing firms, providing valuable insights into the relationship between costs, volume, and profits. By examining fixed costs, variable costs per unit, selling prices, and the expected sales volume, CVP analysis helps management make informed decisions regarding production levels, pricing strategies, and overall business profitability. Manufacturing firms can use this analysis to set appropriate sales targets, determine break-even points, and identify the level of production required to achieve desired profit levels. Additionally, CVP analysis aids in assessing the impact of cost structure changes, such as adjustments in production processes or fixed costs, allowing for strategic adjustments to optimize profitability and enhance long-term financial sustainability in a dynamic business environment.
This is set out to determine the application of cost volume profit analysis in business decision making the constraints experienced as well as the assessment of service coverage.
In chapter one and two the decision makers on management is faced with a lot of problems but when these are addressed, the cost volume profit analysis are not adequately interpreted to management non availability of records and lack of proper knowledge of the users in a manufacturing firm. There is therefore need to embrace and identify the extent and nature of a accounting, services to the business segments in their decision makings especially on the areas of finance of the business.
In chapter three, the researcher restricted himself to a reasonable scope, believed to give a representative of the case understudy. Primary & secondary data were used for data collection while interviews, personal observations and questionnaire distribution played a vital role to the regard percentages and chi-square were used to test the validity or otherwise used the hypothesis formulated.
In chapter four, datas were analyzed and the following findings were made.
Most establishments believe that using CVP when making financial decision will render them effective and efficient management. Some companies or volume profit analysis when making some strategic decision in business.
Lastly chapter five, managers do not play significant role in using accounting decisions. However manager of business needs more training to be able to serve effectively and account should relate well with the management especially during financial decisions to enable management carry up effective performance.
Title Page i
Approval Page ii
Dedication iii
Acknowledgement iv-v
Abstract vi-vii
Table of Content viii-xi
CHAPTER ONE
1.0 Introduction 1
1.1 Overview of the Study 1-2
1.2 Statement of the problem 3-4
1.3 Objective of Study 4-5
1.4 Research Hypothesis 5-6
1.5 Significance/Scope of Study 6
1.6 Limitations of the Study 6-7
1.7 Definitions of terms 7-9
References 10
CHAPTER TWO
2.1 Historical Background of Obika Industry Ltd 11-12
2.2 Definition of Cost Volume Profit Analysis 12-15
2.3 Graphical Approach 15
2.4 Traditional Cost-volume profit 16-17
2.5 Contribution cost volume Profit Chart 18
2.6 Profit-volume Chart 18-20
2.7 Contribution cost volume Profit Chart 20-21
2.8 Algebraic Approach 21-22
2.8.1 Net Profit Equation 22-23
2.8.2 Contribution Margin, Contribution Margin
Ration and Variable Costs Ration 23
2.8.3 Break Even Profit Equation (BEP) 23-24
2.8.4 Manufacturing System 25
2.8.5 Mass Production 26
2.9 Process Production 26-27
2.9.1 Unique/Job Production 27-28
2.9.2 Uses of CVP Analysis 28-29
2.9.3 Adding or Dropping of Product Line 30-33
2.9.4 Make or Buy Decision 33-35
2.10 Profit Planning Decision 35-36
2.10.1 Product Pricing Policies 36-37
2.10.2 Budgets 37-38
2.11 Problems of Costs Volume Profit Analysis 39
2.12 Relationship between cost volume Profit 39
2.13 Cost Division 40
2.14 Changes in Fixed Costs 40
2.15 The Drawbacks of cost-volume Profit analysis 40-43
References 43
CHAPTER THREE
3.0 Research Methodology 45
3.1 Research Design 45-46
3.2 Sample Size 46
3.3 Rationale for the Choice of Variables 47-48
3.4 Data Selection and Analysis 48
3.5 The Methodology for Data Analysis 49-51
3.5.1 Questionnaire 51-52
3.5.2 Personal Interview 52
3.5.3 Personal Observation 52
References 53
CHAPTER FOUR
4.0 Presentation and Analysis of Data 54
4.1 Data Presentation, Classification and Calculation 54-55
4.2 Analysis of Data Test of Hypothesis 56-59
4.3 Analysis of Data to Test of Hypothesis 60-62
4.4 Interpretation of Result 63
CHAPTER FIVE
5.0 Summary of Findings, Conclusion and
Recommendations 64
5.1 Summary of Findings 64-65
5.2 Conclusions 65-66
5.3 Recommendations 66-68
Bibliography 69
Appendix 71-74
INTRODUCTION
1.1 OVERVIEW OF THE STUDY
Due to industrialization in recent years, manufacturing firms have been increasing. They are more complex technologically and compete among each other for survival. It can also be that high growth rate occurs among them due to some levels of efficiency in production. The complexity and competition had been enhanced by increasing technology, use of expertise, computerization and raw material acquisition. There are also government economic growths cost control to mention a few.
Among these control measures, cost control is significantly controlled by firm, since is managerial function which help to reduce cost in production and to again advantage over other first in the same industry. But some questions arise how can a firm be faced with control and management of cost decides on how many units to be employed? At what price will the products be disposed off?
Cost volume profit analysis is a management tool used hen the problems of CVP implications arise in the firm, the problem includes to make or buy decisions, product appraisal, add or drop decisions product planning and promotional mix, distribution channels and profit planning decisions.
Cost volume profit analysis is a valuable and reliable tool. If well applied, helps to alleviate the enumerated problems.
The next questions that arises is do manufacturing firms apply cost volume profit analysis? If yes, how many CVP charts and ratios are plotted (or graphed) and computed in order to mange and control costs while increasing profits and market shares? How are this information relieved from appraised charts and ratio in the light of the basic assumption? How do firms that acquired this information used them in decision making?
1.2 STATEMENT OF THE PROBLEM
Considering the naira and its purchasing power, the researcher founds out that manufacturing firms are faced with heavy cost involvement during the process of manufacturing. The incurred cost have the implications in his overall productions which call to mind the cost problem. How can this cost problem be alleviated?
The economy is not the same today as it has been in the past decade. The exchange rate of naira to foreign currencies and the price fixed for manufacturing goods and services greatly affect the profits to be made on the part of the manufacturers. If prices are not well fixed compared with the sale needed and cost incurred, it will pose a problem hence.
In the past decade, manufacturing firms had been increasing their volume of production. But today because of inflationary trends which prompted increase in cost of production negatively affected the volume of output. As such firms had been forced out of business while the continuing ones find it difficult to produce or maintain their format volume of production.
The result is that the volume produced had reduced and reduce and this pose a volume problem that is capacity under utilization. The next issue: How can these three words cost; volume and profit be understood and inter mingled?
1.3 OBJECTIVE OF STUDY
The aims and objectives of this study is to find out the reason why some firms do not use cost volume profit analysis, in planning and control of cost, and also in decision making.
Again, where some firms use cost-volume profit analysis, the basic assumptions are not implemented. It is also the objective for the study to know why some firms who use cost volume profit analysis end up not combating cost implications problems.
In the objectives, also to analyze the basic assumptions of CVP analysis to know their effect on firms especially those of the manufacturing sector.
It is by highlighting these that a way of making recommendations to the problems will be predicted.
1.4 RESEARCH HYPOTHESIS
Hypothesis one:
H0: The application of CVP analysis graphs and ratios by manufacturers in the control and management of costs.
Hypothesis Two
H1: The application of CVP analysis graphs and ratios enhance profitability, productivity and efficiency decisions in manufacturing firms.
H0: The applications o f CVP graphs and ratios do not enhance profitability, productivity and efficiency decisions in manufacturing firms.
Hypothesis Three
H0: The application of CVP analysis is necessary in the effective control and management of costs.
H0: The application of CVP analysis is not necessary in the effective control and management of costs.
1.5 SIGNIFICANCE/SCOPE OF STUDY
Due to the inherent problems in Nigeria, the CVP analysis has been directly and indirectly affected. It is with this in mind the researcher looks into the underlined consideration of CVP analysis in the manufacturing firms with particular reference to Obika Industry Limited Nkpologwu. In order to have the various approaches of the CVP touched.
1.6 LIMITATIONS OF THE STUDY
It is due to finance that the researcher limits himself to the use of Obika Industry Ltd. In carrying out his project work, despite the numerous manufacturing firms all over the country. The distance between the researcher and the case company posed serious hitch to the smooth carrying out of this project.
The time frame allocation to the writing of this project was so infinitesimal and hence little time was allocated to writing this project.
1.7 DEFINITIONS OF TERMS
COST-VOLUME-PROFIT ANALYSIS (C.V.P): This is a systematic method of examining the relationship between changes in volumes (output) and changes in total sales revenue, expenses and net project. As the model of these relationships, it simplifies the real word conditions that a firm will face is it subject to a number of the understanding assumptions, limitations and a powerful tool for decision making.
COST VOLUME CHART (CVPC): A chart that helps in the enrichment of understanding of the inter-relationship of all factors affecting profit especially cost behaviour patterns over ranges of volume.
FIXED COST (FC): The cost that fixed in total amount over a period of production, but varies per unit of output with the level of production changes.
VARIABLE COST (VC): The cost that directly affects production by varying the level of production but constantly remain fixed per unit of output.
SEMI VARIABLE COST (SVC): The cost that have both fixed and variable cost features. It fluctuates as changes occur with relevant range but not in direct proportion to the changes.
CONTRIBUTION MARGIN (CM): It is the product profit of sales minus all variable costs.
BREAK-EVEN POINT (BEP): The point of activity where total cost are equal and the firm neither making profit nor loss.
MARGIN OF SAFETY (MOS): This is the excess of budgeted sales over the break even sales –volume
PROFIT/VOLUME RATIO (PVR): Is the relationship between contribution and sales value.
GROSS PROFIT RATIO (GPR): This is the commonest measure of profitability. The gross profit margin measures the efficiency with which the firm produces each unit. Its products by discounting all operating expenses.
TIME-SERIES ANALYSIS (TSA): This approach does an evaluation of the firms operations over a period, the purpose being to evaluate the firms performance over this specific internal of time.
PRODUCTION DEPARTMENT (PD): A unit in which operations are performed on the part or product and whose costs are not further allocated.
NET PROFIT RATIO (NPR): The net profit margin measures the percentage of sales remaining after expenses including taxes has been deducted.
Cost Volume Profit Analysis For Profit Planning In Manufacturing Firms:
Cost-Volume-Profit (CVP) analysis is a valuable tool for profit planning in manufacturing firms. It helps businesses understand how changes in production volume, sales price, variable costs, and fixed costs impact their profitability. By using Cost-Volume-Profit analysis, manufacturing firms can make informed decisions about pricing, production levels, and cost management to maximize profits. Here’s a step-by-step guide on how Cost-Volume-Profit analysis can be applied for profit planning in manufacturing firms:
- Identify Key Variables:
- Sales Price per Unit: Determine the selling price for each unit of your product.
- Variable Cost per Unit: Calculate the variable cost associated with producing each unit.
- Total Fixed Costs: Identify all fixed costs that your manufacturing firm incurs, such as rent, salaries, and utilities.
- Contribution Margin:
- Contribution margin per unit = (Sales Price per Unit – Variable Cost per Unit).
- Contribution margin ratio = (Contribution Margin per Unit / Sales Price per Unit).
- Break-Even Analysis:
- Calculate the break-even point in units and dollars using the formula:
- Break-Even (in units) = Total Fixed Costs / Contribution Margin per Unit.
- Break-Even (in dollars) = Total Fixed Costs / Contribution Margin Ratio.
The break-even point represents the level of production and sales at which the firm covers all its costs, resulting in zero profit.
- Calculate the break-even point in units and dollars using the formula:
- Profit Analysis:
- Calculate the profit at different levels of production and sales.
- Profit = (Sales Volume × Sales Price per Unit) – (Variable Costs per Unit × Sales Volume) – Total Fixed Costs.
- Calculate the profit at different levels of production and sales.
- Margin of Safety:
- Margin of Safety (in units) = Sales Volume – Break-Even Sales Volume.
- Margin of Safety (in dollars) = Sales Revenue – Break-Even Sales Revenue.
The margin of safety indicates how much sales can drop before the firm reaches the break-even point. A higher margin of safety provides greater financial cushion.
- Target Profit Analysis:
- Determine the desired profit level and calculate the sales volume needed to achieve it using the formula:
- Target Sales Volume = (Total Fixed Costs + Target Profit) / Contribution Margin per Unit.
- Determine the desired profit level and calculate the sales volume needed to achieve it using the formula:
- Sensitivity Analysis:
- Assess the impact of changes in key variables, such as sales price, variable costs, or fixed costs, on profit. This analysis helps in understanding how different scenarios can affect profitability.
- Optimization:
- Use Cost-Volume-Profit analysis to find the production and pricing strategies that maximize profit. This involves analyzing different combinations of prices and production levels to identify the most profitable approach.
- Continuous Monitoring and Adjustment:
- Regularly review and update your Cost-Volume-Profit analysis as market conditions change. Adjust pricing, production levels, and cost structures accordingly to maintain or enhance profitability.
- Risk Management:
- Consider potential risks and uncertainties in your analysis, such as fluctuations in demand, material costs, or competition, and develop contingency plans to mitigate these risks.
In summary, Cost-Volume-Profit analysis is a powerful tool for profit planning in manufacturing firms. It provides insights into the relationship between costs, volume, and profit, helping businesses make informed decisions to achieve their financial goals. However, it’s important to use real and accurate data and to be mindful of the assumptions and limitations of Cost-Volume-Profit analysis in practical decision-making.