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AN APPRAISAL OF THE EFFICIENCY AND IMPACT OF COST CONTROL SYSTEM ON CORPORATE PROFITABILITY

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The dynamic nature of our times has put so much on
business that their survival can no longer be taken for
granted but must be sort for. That a business strength
progressed or outpaced its competitors depends largely on
the quality and strength of its management. People always
make enquires pertaining to the issues that arouse their
interests-How, where, when, how and what it will cost to get
the necessary information, that will aid the attainment of
the organizational goals.
In all human transactions, we do talk of cost almost
each minute of the day. All our daily expenses are been
resolved in terms of cost-what cost, how cheap, how costly.
In our offices we passively talk of cost savings, cost of
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materials, overhead service cost, labor cost and many
others.
In an economist’s point of view, we visually hear the
same song-marginal cost, opportunity cost, cost curve,
total cost and what else?
The above submissions attempt to suggest that cost
perhaps is a most important concept in our every day lives
and most diversely conceived.
Hence, the objective of every business organization is
charged with both financial and non-financial objectives,
which drive them towards the actualization of their set
organizational goals
According to Pandy, the financial motives of an organization
comprises of:
• Maximization of shareholders wealth
• Profit maximization and
• Service to customers.
While the non-financial objectives are
Making financing and career
development a priority.
Responsible to the community and
Developing cordial relationship with the host
community.
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Above all, profit maximization rank the most
prominent of the reason of going into business organization.
For business to attain its aim, it tends to cut across cost
reduction, thereby meeting its minimal cost budgets-profit.
However, Okafor (1983:142) opine that profit is the
ultimate measure of overall performance. When
management has planned, organized and controlled its
human and material resources properly, corporate activities
attain a level of effectiveness, which shows up in profit.
Probably, profits are acid test of the individual firms
performance.
In appraising a company we must first understand
how profit arise. The concept of profit maximization is very
useful in selecting the alternatives in making a decision at
the firm level. Profit forecasting is an essential function of
any management. It relates to projection of future earnings
and involves the analysis of the corporate behaviours, the
sales volume, prices and competitors strategies etc.
The main aspects covered under this area are the
nature and control strategies adopted by managerial
decision making as towards attaining corporate goals with
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its budget limit.
Cost control helps firms to improve its profitability and
competitiveness. Jhingan et el (2004:267) added that cost
control has a regulatory effect. For better performance and
better results certain means of control have been evolved.
Such cost instruments are budgetary control and standard
costing. Cost reductions are analyzed via variance analysis.
1.2 STATEMENT OF THE PROBLEM
This study is confronted with the view of discovering
whether organization especially manufacturing companies
adopts certain cost control measures in their products
marketing, as well as production processes, which
ultimately have an impact on their profitability and cash
flow analysis.
In this aspect of control, it incorporates cost reduction
processes and a cost reduction programme, initiated to take
the goal of bringing down the margin of business costs from
a current level perceived as not too safe, to a desired level,
with the ultimate intention of reaching a targeted profit
margin
1.3 RESEARCH QUESTIONS
For emphasis on the study, the following research question
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can be used to throw more light on the study;
1. What relationship exist between cost and control in
corporate profitability.
2. What cost control instruments are mostly used for
cutting down expenses thereby attaining maximum
profitability?
3. To what extent, if any, can cost be controlled by the
firm for the reasons of profitability?
4. What cost factors are relevant in controlling costs in
an organization?
5. What effect does the adjustment in the cost of an
organization exert on the profitability of a given
company.
1.4 OBJECTIVE OF THE STUDY
From the above stated problem this study shall look
into:
1. All the relevant aspects of a given cost control
measures, which have direct or indirect impact on the
profitability of an organization.
2. The relationship, which exists between, budgets, cost –
control, cost reduction and profitability of the firm.
3. To know the specific cost control measures which have
been adopted and applied in an individual firms.
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4. The degree of apportionment of the responsibility of
cost control measures in an individual firms and how
costs can be controlled for firm to attain its given
standard.
1.5 SCOPE OF THE STUDY
These research will reveal the essences of cost control
in manufacturing firm, the cost structure of the sector, cost
control measures adopted to minimize waste of resources
and invariably the major procedures embarked to ensure
that actual results are in line with the set standard; so that
waste are measured and appropriate action taken to correct
the activity.
The study will also envisage the nature of cost
accounting in use in the organization by the management. It
will also emphasize on the method of setting standard if the
firm adheres strictly to its standard and application of
deviations analyzed and reported.
The study shall be limited to the financial constraints, time
range and the availability of resources needed for the
actualization of corporate goals.
1.6 RESEARCH HYPOTHESIS
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H0 Inefficient application of cost control leads to a decline
in the profit level of an organization, when other
factors are constant.
H1 Efficient and adequate application of cost control leads
to increased in profit, while all other factors are constant.
1.7 SIGNIFICANCE OF THE STUDY
The result of this research work is expected to widen
the view held by potential managers and other corporate
bodies, who have been in one way or the other perhaps,
been have parochial view of the needs of cost control. It will
be of great benefit to manufacturing and processing
industry(s).
Potential stakeholders will firms they intend to extend
credit/funds to the company(s) because this will broaden
their view and knowledge on management projection.
The target audience will enjoy the increase in quality
product with corresponding reduction in prices.
Relevant industries will be exposed to determine the
increased level of demand, which invariably increase
profitability.
Tax authorities and auditors are not left out of the
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benefits derivable from cost control. Increase revenue will
subsequently boost infrastructures facilities.
1.8 DEFINITION OF TERMS
Cost: It is the amount of resources put into the production
of goods and or service. It’s often expressed in monetary
terms and is also’ seen as the expenditure resulting from
providing goods and services.
Cost Control: Control means compelling events to conform
to plan. Therefore cost control is the process whereby
management seeks to influence costs so as to keep them
within planned limits.
Cost Center: This is a desirable area of activity within a
business to which costs can be attributed. Such centers
incur expenses but do not directly generate revenue, for
instance the personnel department, accounting department,
public relation department etc.
Impact: This is the degree to which a particular
management policy and or measures yield desire result.
Budgetary Control: Is part of overall system of
responsibility accounting. Establishment of budgets for
each area of functional responsibilities so that the
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performance required in order that the objectives of the
business as a whole may be achieved. That is regular
comparison of actual with budgeted results.
Standard Costing: Standard costing is a method of
ascertaining costs whereby statistics are prepared to show;
• The standard cost
• The actual cost and
• The difference between variance.
Management: This is the process of combining and
utilization of organizational resource towards the
achievement of the common, or organizational objectives.
Efficiency: This explains the ratio of output to inputs. It is
the amount of output per unit of input, that is the amount
of resources used to produce a unit of output.
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REFERENCES
Lucey, T. (1984), Costing an instructional manual; London, DP
Publishers.
Meigs, W. B et at (1977), Accounting: The basis for business
Decisions Megraw Hill book company.
Okafor, F.O. (1983), Investment Decisions: Evaluation of project
and securities Gostak printing and publishing company Ltd
Okoye, P.V.C (1999), Cost and management accounting: Basis
concept Application and Issues; Enugu Sneap press Ltd.
Pandy, I.M (1999), Financial Management (8th ed), Delhi Vikas
House PVT Ltd.
Wilson, R.M.S (1975), Cost control Hand-Book, New York, USA,
John Wiley and Sons Inc.

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