THE EFFECT OF COST REDUCTION STRATEGIES ON THE PROFITABILITY OF MANUFACTURING FIRMS
Same Topic: You can replace it with any of the Topic Below
THE IMPACT OF COST REDUCTION TECHNIQUES ON THE PROFITABILITY OF MANUFACTURING COMPANIES.
THE EFFECT OF COST-CUTTING STRATEGIES ON THE PROFITABILITY OF MANUFACTURING FIRMS.
| PAGES = 54 | CHAPTER = 5 |
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
A company’s ability to manage costs effectively plays a crucial role in its growth path. This is because maximizing profitability requires minimizing expenses as much as possible. To stay competitive in today’s business environment, organizations have recognized that cost reduction is a vital tool (Alireza & Mahdi, 2019). Even successful companies can significantly enhance their overall revenue by adopting cost-cutting strategies. Efficient and effective cost management is crucial, not only for reaching a company’s profit goals but also for securing its long-term survival, as highlighted by Ogunnaike (2020). To showcase growth and improve profitability, an organization should incorporate a cost reduction mechanism. According to the Chartered Institute of Management Accountants (CIMA) in London, cost reduction refers to achieving a measurable and lasting decrease in the unit cost of manufactured goods or services provided, without compromising the intended functionality of the product. Gaurav, Jain, Kapoor, and Nateriya (2018) describe cost reduction as “the process of identifying, eliminating, and seeking out unnecessary expenses within an organization to boost profitability without affecting product quality.” It is essential for an organization to continually advocate for the exploration of new methods and avenues to reduce costs. Such an approach reflects the organization’s strategic commitment to cost management (Figar & Ivanoic, 2022). Manufacturers can lower material, labor, and productivity costs related to production by adopting cost reduction strategies such as value engineering and value analysis, strict budgetary control, target costing, and life cycle costing. Therefore, this study examines the relationship between profitability and the cost reduction strategies utilized by manufacturing companies in Nigeria.
1.2 Statement of the Problem
The primary goal of any business organization is to enhance its growth potential by generating revenue while minimizing expenses. However, a common misconception among many business owners is that increasing sales is the most effective way to boost profits. Currently, Nigeria’s manufacturing sector faces numerous challenges that require urgent attention. One significant issue is the dominance of imported products, which are often priced lower than locally produced goods, thereby posing a threat to the sales of Nigerian merchandise (Adigbole, Adebayo, & Osemene, 2020). Research by Nwatu et al. (2020) indicates that manufacturing companies have encountered unexpectedly high operating costs, resulting in a decrease in profitability. These costs are associated with the management and upkeep of regular business activities. Adeleke (2021) notes that many manufacturing companies in Nigeria have shut down, while larger corporations have either merged with or acquired several smaller firms. Some businesses have opted to relocate their operational centers to neighboring countries (Abdul & Isiaka, 2019).A review of the existing literature revealed a range of conflicting findings on the impact of cost reduction on the profitability of companies within and outside the Nigerian economy. Some studies have focused on shorter time frames compared to this research. Furthermore, several studies were conducted in countries with either significantly smaller or larger economies than Nigeria, making it difficult to apply their findings due to the political, economic, and cultural differences. The present study aims to address these gaps. The study is centered on the issue of cost reduction strategies and their effect on profitability within the manufacturing sector. The primary objective of this research is to thoroughly examine how various cost reduction techniques influence the profitability of manufacturing companies, with a particular focus on Indomie Company located in Choba, Port Harcourt. This investigation aims to provide a detailed analysis of the relationship between cost management practices and financial performance, offering insights that are specific to the context of Indomie Company. By doing so, the study seeks to contribute valuable knowledge to the field of cost management and its impact on the overall financial health of manufacturing enterprises.
1.3 Objectives Of The Study
The principal objective of this study is to conduct a comprehensive analysis of the effects that cost reduction techniques have on the profitability of manufacturing companies. The research will delve into specific aspects of cost reduction, focusing on how fluctuations in material costs, labor costs, and administrative overhead influence the financial performance of manufacturing firms. By examining these variables in detail, the study aims to uncover the relationship between each cost reduction method and its impact on overall profitability, providing valuable insights into effective cost management strategies within the manufacturing sector.
1.4 Research Questions
The study will be directed by the following research questions:
How do variations in material costs, as a component of cost reduction methods, impact the profitability of a manufacturing company?
In what ways do changes in labor costs, as part of cost reduction strategies, affect the profitability of a manufacturing company?
What is the influence of fluctuations in administrative overhead, considered as a variable in cost reduction techniques, on the profitability of a manufacturing company?
1.5. Research Hypotheses
Ho1: Material costs, as a variable in cost reduction methods, do not have a significant and positive impact on the profitability of a manufacturing company.
Ho2: Labor costs, as a variable in cost reduction methods, do not significantly and positively affect the profitability of a manufacturing company.
Ho3: Administrative overhead, as a variable in cost reduction methods, does not significantly and positively influence the profitability of a manufacturing company.
1.6 Significance Of The Study
The study will be highly valuable to the manufacturing sector, as it offers insights into a streamlined three-dimensional approach to cost reduction strategies and their financial implications for manufacturing companies. By leveraging the findings from this research, manufacturing firms will be better equipped to enhance their financial performance.
From a theoretical perspective, this study contributes to management accounting literature by expanding knowledge on cost reduction methods and their impact.
1.7 Scope Of The Study
The central focus of this study is to thoroughly evaluate the impact of various cost reduction techniques on the profitability of manufacturing companies, with particular attention given to Indomie Company situated in Choba, Port Harcourt. This research aims to provide a detailed analysis of how different cost-saving strategies affect financial outcomes within this specific context. To achieve this, the study will analyze comprehensive data collected over a five-year period, from 2012 through 2016, to understand the trends and results associated with cost reduction efforts in the manufacturing sector.
1.8. Limitations Of The Study
Regarding the limitations of this research project, it is important to note that including all manufacturing industries across Nigeria was not feasible. As a result, the study was confined to a selection of manufacturing companies.
Additionally, time constraints were a significant challenge for this research. The study was conducted during a period when the researcher was managing a heavy workload, which made it difficult to attend all scheduled appointments with respondents.
1.9 Definition Of Terms
Cost Management: Cost management generally involves strategies aimed at reducing expenses and is a common approach used by firm managers to address declining sustainable profitability.
Cost Control: Cost control is the process of ensuring that expenses remain at or near the budgeted levels. This is achieved through effective budgeting and budgetary management systems that help maintain costs within the intended or anticipated range.
Cost Reduction: Cost reduction is a systematic approach to decreasing expenditures. It involves a continuous process of thoroughly evaluating all cost components and business aspects to enhance overall business efficiency and effectiveness.