COST CONTROL IN MANAGING INDUSTRIES: A CASE STUDY OF WEST AFRICA MILK COMPANY PLC., LAGOS

 

PREFACE

The primary aim of this research project is to prepare manufacturing establishment thoroughly for the task of controlling their cost of production concentration has therefore made on the pertinent factors necessary for the fulfillment of this project.

This work is written to include the dangers of uncontrolled costs and need and possible method of cost control.  The method have been found necessary in familiarizing manufacturing organizations with the act of controlling their production costs which will avail them the opportunity of maximizing profit without much price increase.

It is therefore suggested that big enterprises and public corporations should get acquainted with the techniques developed in this project and apply them whenever possible in controlling their costs of production.

ABSTRACT

 

Profit maximization is the pursuit of every business organization.  Profit itself is the excess of revenue over expenditure.  To obtain this profit, increase in selling price of the product or reduction in the cost of production is inevitable.  Since excessive price increase is dreaded by the public, it becomes necessary to achieve the business objective through controlling the cost of production of each product.

This project, therefore, is undertaken to give actual background on cost control measure, the need for the control, cost items to be controlled and affect of uncontrolled cost of production on the organization, using the West Africa Milk Company PLC. Lagos as a case study.

According to the study, uncontrolled costs could lead to higher operating costs, lower profit margins and dissatisfaction among shareholders.

Using observation, interview and questionnaire method, it was found that cost could be controlled in the different manufacturing areas such as material, labour and overheads.

Also discussed was the benefit of production cost control to the industry under study.  The major findings was that company has not been able to produce to its installed capacity, it employed a system of remuneration that guaranteed a fixed salary and its production budget was based on the average performance of previous year results.

However, the use of standard costing has been advocated because it will avail the company the opportunity of company actual cost with standard in order to check necessary variances and also to make for easier interpretation of management reports.

Chapter one

• Introduction 1
• Statement of problem 7
• Statement of objectives 8
• Significance of the study 9
• Scope and limitation 10
• Definitions of terms 11

 

Chapter Two

Literature Review                                                          13

• Material Control 14
• Labour Control 22
• Overhead Control 30
• Cost Control 33
  • Budgetary Control 33
• Standard Costing 49
• Variance and Variance Analysis. 59

 

Chapter Three

• Research Deign and Methodology 74
• Sources of Data 74
• Measurement Instrument 76
• Instrument Design 77
• Instrument Administration 79
• Instrument Distribution
• Reliability of Data 82
• Data Analysis Method. 83

 

Chapter four

• Data Analysis 84
• Costing System 84
• Material costing           86
• Labour Control
• Overhead Control 91
• Budgetary Control. 91

 

Chapter Five

• Findings 96
• Recommendations 100
• Conclusion 102

Bibliography                                                        104

Questionnaire                                                       107

CHAPTER ONE

 

 

1.1     INTRODUCTION

Manufacturing is becoming more complex and competitive with each passing day.  The complexity can be viewed from the angle of technology, computerization, raw material sourcing, governments’ economic policy impact and cost control.  While some of the above factors are externally controlled, such factors are costs controls, forms an internal efforts of the firm.  For instance, computer and technology industries can be acquired by the firms based on expert advice from consultants but cost control is a conscious effort by the management of a firm to reduce of production and thereby gaining advantage over the other firm in the same industry.

Cost control becomes imperative when one looks at the objectives of firms, which among other things include making as much profit as possible to satisfy the investors, becomes a good corporate entity to customers, to government and other external member, to government community.  All these aims are tied to the cost control measures.

“Because transaction usually involves both revenue and costs with difference between the two being profit.  Since profit equals revenue (output) runs cost (input) it can be seen to be a measure of efficiency in that it relates output to input.  Therefore, an organization with N100 million and cost of N60 million is more efficient than the industry but having revenue of N100 million and cost of N70 million since the former loses less input to produce a given output”.

Certain programmes introduced by government aim at streamlining the economy such as structural Adjustment program (SAP) 1986, second-tier Foreign Exchange Market (SFEM) 1986 and deregulation of interest rates in banks created effect which lend credence to costs control by many people.  These programmes have left flows with low capacity utilization high cost of imported spare part, high costs of equipments and consequently high cost of their products.  The effect of the above situation is that top management put pressure on their organization functional areas at each point to control costs.  Therefore, jobs are being timed seriously, material better controlled standards are being set and budgets are being made more detailed.

Costs control can be done in two ways “operating control and accounting control”.

Operating control is done by controlling costs through personal observation and supervision of operations.  Such control attempts to keep wastes idleness, inefficiency labour and other costs lead in checking costs are based on physical and procedural safeguards, it ensures that costs are incurred on proper authority assigned responsible for different phases or costs incurred and carry out effective supervision so that factors upon which costs are incurred are maximally utilized.

Accounting control, on the other hand contemplates the creation of a system of recording which will establish accountability for costs and the employments of current pertinent and coincide accounting and statistical reports, to reveal how the people responsible for costs are discharging their responsibilities.  Thus accounting control involves the establishment of cost standards and development of variance therefore, the assembly of data for constructing budgets covering all phases or activity and the preparation of timely statements of financial condition and the making of future policy.

This research will therefore attempt to x-ray the cost control measures in West Africa Milk Company (WAMPCO) PLC. as a case study.  Finding from WAMCO PLC. Is equally to literature review of chapter two, which acts as standard for cost control in order to form opinion.

West Africa Milk Company PLC. (WAMCO) with factory site at 7B Acme Road Ogba Ikeja in Lagos was incorporated wide and also involved in cross-boarder trade.  It has 100 staff nationwide.  WAMCO operated in Nigeria for 31 years and in Holland for 50 years.  Production started in 1975 with peak milk.  WAMCO depend degree of 80% on import raw material on production and have low capacity of customer nationwide.

In a bid to have a stable market West Africa Milk introduced “Three Crowns” and another brand of evaporated milk.  Three Crowns was introduced in the year 1986 and peak milk 50 years.  The raw material for the products such as hydrous milk fat, skin milk powder and buttermilk power are imported from Holland.

West Africa Milk Company PLC is an affiliate of Frisland Coberco Diary Foods (FCDF) Holland.

 

Figure 1.1:  A FRAMEWORK FOR COST CONTROL SYSTEM

INPUTS                                                               OUTPUTS

Capital labour                                            Returning of investment

Material services  Input: The Company     consumer satisfaction

Knowledge, plans                                       goods and services

and aspirations                                           market shares.

 

CONVERSION UNIT

If the idea of input conversion system is to cost control we have the diagram below:

INPUT                           CONVERSION                      OUTPUT

 

 

 

 

 

The diagram contains three inputs, objective or desired policies or (constrain) and plan or means to ends within resources that are available to the company (sales forces plant and equipment materials etc.) and allocates these in the best available way in line with requirement for the attainment of objectives.  The detailed workloads must be established and standard must be set for comparative purposes.  This is finally followed by executive stage the plan is put into effect, the major output in this simple framework or performance are feed backs to the decision makers and are compared with desired levels of performance this necessitates correction of deviation from plan if any.

 

• STATEMENT OF PROBLEMS

The fact that the manufacturing company’s aim is to maximize profit and that this will have to be met under certain conditions such as competition with other firms and government economic policies give insight into the problem of production costs control.

Government regulation such as SAP and SFEM leave firm with such problems as low capacity with its attendants, high cost of fixed overhead per unit of product, high cost of foreign exchange (High exchange rate) which causes high costs of spare parts, raw material and equipment.  All these cause high cost of the products produced by their firms.

There high costs are posed to consumers of their products.  But given the economic predicament of our time some consumers boycott their products or seek alternative cheaper substitute.  This limits the scope of market of their firms.

Briefly the problems emanating from the study are:

• Low capacity utilization
• High cost of production generally
• Rationalization of labour force retrenchment
• Lack of export orientation

 

• STATEMENT OF OBJECTIVES

The objective of the research is to examine cost control measure by the manufacturing firms in order to compare it with cost control measure in the operation.

(a)     Evaluate the control system as to their effectiveness.

(b)     Ascertain whether the present levels of performance are adequate for plan.

(c)      To find out any inherent deficiency and to make recommendation for solving problem.

(d)     To come out with a realistic and feasible proved on how idle capacity both in labour and material within the enterprise could be eliminated.

(e)      Improving and updating any absolute technique in line with recent trends.

(f)      Finally, it is hoped that the research will be a guide for future decision makers and serve as a benchmark for future research students in the field of production cost control.

 

• SIGNIFICANCE OF THE STUDY

Since production cost constitutes a major proportion of any manufacturing establishment operating costs, the result of this study would enhance the effective and efficient control of such costs by management so as to stay in business.

It would also recommend ways by which the highest levels, in order to achieve its desired profit objective.  In addition, the study will be of benefit to other decision makers and future research work on the same related problem.

 

• SCOPE AND LIMITATION

The research is a five-chapter analysis of cost control measure in West Africa Milk Company PLC. and its different postulate on cost control by eminent writers lecturers and practitioners.

Chapter one dealt on the general business outlook and effect of cost control on a firm.  It also presents brief history of West Africa Milk Company PLC being used as case study in the research.

The second chapter reviewed numerous literatures by many knowledgeable scholars.  This chapter acts as the standard that is used to measure actual practices of firm as regards cost control.

The third chapter is on research procedure, research instruments and their administration.  The chapter tried justifying the reliability of amount of data that was used in the research.  The fourth chapter analyzed data on costs control got from West Africa Milk Company Plc. to ascertain the extent of its conformity.

The final chapter, that is five, talked on the findings recommendation and conclusion.  To achieve the above, the researcher designed questionnaire information on procedures, and policies of the firm on control of costs.

 

• DEFINITION OF TERMS

Costs:                   This is the amount of expenditure actual of nominal incurred on or attr4ibutable to a specified thing.

Control:      This is defined by Oxford Advanced Learner’s Dictionary as “Power or Authority to direct, order or restrain”.

This can be seen in the ways the manager order or limit the use of resources of an organization to achieve maximum efficiency and effectiveness.

Cost Control:       This provides useful information to management in exercising control over costs.

Manufacturing:     This is the act of making something of value from a single material (analysis) or combination of materials (synthesis).

Synthesis is chosen because this is the method used by the West Africa Milk Company PLC (WAMCO) through a process known as recombination use such materials as hydrous milk peak, silk milk powder, buttermilk and refined palm oil to produce evaporated milk.

Cost Centre:         A cost is a location, person or item of equipment (or good of these) for which costs may be ascertained and used for control purposes.

 

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