THE IMPACT OF COST REDUCTION TECHNIQUES ON THE PROFITABILITY OF MANUFACTURING COMPANIES

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The proficiency of a company in cost management significantly influences its trajectory of expansion. This is due in part to the fact that in order to optimise profitability, expenses must be minimised to the bare minimum. In order to maintain a competitive edge in the contemporary business landscape, organisations have recognised the criticality of cost reduction as an essential mechanism (Alireza & Mahdi, 2019). In fact, even profitable organisations can benefit from implementing cost-cutting strategies in order to generate a substantially greater overall revenue from their products or services. Effective and efficient cost management is critical not only for achieving the profit objective of a company but also for ensuring the entity's continued existence, as stated by Ogunnaike (2020). An organisation should implement a cost reduction mechanism in order to demonstrate development through an increase in profits. 

As defined by the Chartered Institute of Management Accountants (CIMA), London, cost reduction is the attainment of a tangible and enduring decrease in the unit cost of manufactured commodities or rendered services, while ensuring that the product's intended functionality remains unaffected. Gaurav, Jain, Kapoor, and Nateriya (2018) define cost reduction as "the process of identifying, eliminating, and searching for unnecessary expenses within an organisation in order to increase profitability without compromising product quality." It is imperative for an organisation to consistently advocate for the notion of perpetually exploring novel methods and channels to curtail expenses. Such promotion would indicate that the organisation adopts a strategic stance towards this matter (Figar & Ivanoic, 2022). 

Manufacturers can reduce the material cost, labour cost, and productivity cost associated with manufacturing by implementing cost reduction strategies including value engineering and value analysis, stringent budgetary control (budget discipline), target costing, and life cycle costing. Hence, the focus of this study is the correlation between profitability and cost reduction strategies implemented by manufacturing firms in Nigeria.

1.2 Statement of the Problem

The only purpose of any business organisation is to increase its development potential by generating revenue and decreasing expenses. A new problem arises when the majority of business proprietors believe that increasing sales is the most effective method for turning a profit. Presently, the manufacturing sector in Nigeria is confronted with an array of challenges that demand immediate attention. A substantial challenge to Nigeria's merchandise sales has been posed by the preponderance of imported products, which are priced lower than domestically produced alternatives (Adigbole, Adebayo, & Osemene, 2020). According to the findings of Nwatu et al. (2020), manufacturing companies have experienced unanticipatedly high operating expenses, which have led to a decline in profitability. These expenses are related to the administration and maintenance of routine business operations. According to Adeleke (2021), a considerable number of manufacturing firms in Nigeria have ceased operations, while the larger corporations have merged with or, at best, acquired numerous smaller firms. Certain entities have chosen to transfer their operational centres to adjacent nations (Abdul & Isiaka, 2019). 

A survey of the existing literature, on the other hand, uncovered a multitude of contradictory findings regarding the effect of cost reduction on the profitability of companies operating in and beyond the Nigerian economy. Certain studies have examined shorter time periods in comparison to the present investigation. Additionally, some studies were carried out in countries with relatively smaller or larger economies than Nigeria, which renders it unfeasible to extrapolate the results of those studies due to the political, economic, and cultural disparities that exist therein. However, these gaps will be filled by the present investigation.

 It is premised on the aforementioned problem that the main objective of the study is to investigate the impact of cost reduction techniques on the profitability of manufacturing companies with particular emphasis on Indomie Company, Choba, Port Harcourt.

1.3 Objectives Of The Study

The main study objective is to examine the impact of cost reduction techniques on the profitability of manufacturing companies. The study will specifically find out how 

changes in material cost, changes in labour cost and changes in administrative overhead as variables for cost reduction method influences the profitability of a manufacturing company.

1.4  Research Questions

The study will be guided by the following questions;

What is the effect of changes in material cost as variables for cost reduction method on  the profitability of a manufacturing company?

What is the effect of changes in labour cost as variables for cost reduction method on  the profitability of a manufacturing company?

What is the effect of changes in administrative overhead as variables for cost reduction method on  the profitability of a manufacturing company?

1.5. Research Hypotheses

Ho1: There is no significant and positive effect of material cost as variables for cost reduction method on  the profitability of a manufacturing company.

Ho2: There is no significant and positive effect of labour cost as variables for cost reduction method on  the profitability of a manufacturing company.

Ho3: There is no significant and positive effect of administrative overhead as variables for cost reduction method on  the profitability of a manufacturing company.

1.6  Significance Of The Study

The study will be of great importance to the manufacturing industry as it provides information on a simplified three dimension approach to cost reduction strategies and the financial impact the strategies have on manufacturing companies. Manufacturing companies will be in a position to boost their financial performance by using the findings of the research.

Theoretical contribution of this study is providing knowledge for management accounting literature about cost reduction methods.

1.7 Scope Of The Study

The general focus of this study boarders on  the impact of cost reduction techniques on the profitability of manufacturing companies with particular emphasis on Indomie Company, Choba, Port Harcourt. The study will cover a period of 5years from 2012-2016. 

1.8. Limitations Of The Study

As regarding the limitations on this research project, it would be impossible to include all manufacturing industries in Nigeria, therefore, this study was limited to a selected manufacturing companies.

Time constraint was another strong factor that posed as a limitation to this research because the study was carried out when the researcher had so much work load. Thus, it was difficult for the researcher to meet up some of the appointment with respondents.

1.9 Definition Of Terms

Cost Management: Cost management often refers to cost cutting and it's commonly approached that firm managers use to respond to the decreasing sustainable profitability.

Cost control: Cost control is the process of maintaining expenses at the level intended for them to be at or at the level anticipated for them utilizing robust budgeting and budgetary management systems

Cost reduction: Cost reduction is a planned approach to reduce expenditure. It is a continuous process of examining critically all elements of cost and each aspect of the business with a view to improving business efficiency.