CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The primary objective of every business organization is to maintain eicient and eective management in order to achieve growth. But the task of achieving this objective is not attainable in a manufacturing firm where there is poor control of production cost. Manufacturing firms in West Africa, particularly in Nigeria have experienced various set books due to poor control of cost of production. It is against this back drop that this subject entitled “Analysis and control of cost of production in manufacturing firms” is of interest to the researcher. The study is limited to manufacturing firms, for the relevance of production management otherwise known as control of cost of production in these establishments. During the military rule, the federal military government imposed a ban on the importation of some essential raw materials and other items. This ban made most Nigerian manufacturing firms to search for new forms of production patterns that will provide a hedge against our turbulent and dynamic economic environment. Prior to this era, majority of our manufacturing firms have wasted valuable resources as a result of lack of interest in the area of control of production cost. It is hence, not surprising that waste and other vices that characterized the oil boom era are still prevailing in most of our manufacturing establishments. Wasting, fine and Gary (1979:4), emphasized that the efficiency of nay business in predicated upon having adequate material supplies equipment available in the right quantity or quality at the proper time, place and price. Ineffective control of production cost has a direct negative effect on the profitability of the firms. For instance, the purchase or supply of wrong quantity or quality of materials or even wrong delivery of materials can affect profitability adversely.
Hence for any manufacturing establishment to be functioning accurately, it must take adequate measures towards analyzing and controlling cost of production in order to ensure that the interest of their customers and organization goals are met. Profit maximization is recognized as one of the objectives of these manufacturing firms. Profit is recognized as excess of total revenue over total cost during a specific period of time. To achieve this profit making objective, control must be exercised over cost of production. Today, most manufacturing firms are in serious profit squeeze. They struggle to maintain satisfactory earning in a situation where costs are increasing. Government stabilization measures which are aimed at re-structuring and improving the economy are not helping matters, rather causing increase in price of commodities as a result of increase in cost of inputs. To maintain a stable production system in the face of these conditions many manufacturing establishments are taking bold steps to control if not reduce cost, eliminate waste and increase profitability (Productivity) automation and improved technological techniques are helping to control and on reduce cost, but not sufficient to mention. Therefore, the motive of this researcher is to critically examine and analyze various production components with great emphasis on control measures being used by manufacturing establishments, using Innoson company (Nig) limited, Enugu as a case study.
1.2 STATEMENT OF PROBLEM
Analysis and control of cost of production is a very important aspect that lead not only in the sustenance of manufacturing firms but also help in the improvement and achievement of growth and higher profitability. Marketing environmental forces such as price, customers, competitors, suppliers political, legal, social, natural and economic forces have been some of the nagging problems facing manufacturing firms. According to Okafor (1995:19) these are uncontrollable elements that make difficult the attainment of a firms objective. Lack of material control system is also a problem factor production management in manufacturing firms. Most Nigerian manufacturing firms do not have good materials control system. The negative effect of this is that wrong quantity and quality of materials can be purchased at a higher price, thereby increasing the cost of production. More so, most manufacturing establishments operating in Nigeria have a poor labour control system. The personnel and production unit of most manufacturing establishment are not functional. Equally, the inability of management of most of these manufacturing firms to effectively control operational cost had resulted in variance between actual production cost and budgeted production cost which could lead to inefficient manufacturing or business failure. In line with the foregoing situations, the researcher believes, affect the profitability of the business, which is the child of effective and efficient manufacturing. Attention will be paid in this study to materials and storage space, which must be adequate according to the nature of materials purchased and shored. Assigning the onus of material procurement to a specific department within the organization and proper materials inspection by responsible department. Also, the research aimed at finding out good cost control measures in manufacturing firms determining the organizational structure of the business according to its operation in terms of production of goods and services.
1.3 OBJECTIVE OF THE STUDY
As mentioned earlier, the goal of every business is (or should be) profit maximization, the management of most Nigeria manufacturing establishments, exist primarily for this motive hence, the concern otherwise known as objectives of this study is as follows: i. To evaluate the internal control system of manufacturing establishments in order to come out with realistic and feasible proposal on how idle capacities, both in labour and materials could be eliminated. ii. To find out inherent deficiency involved in production management and recommend approaches to proper design, installation and operation of an adequate and good cost/production management system. iii. To ascertain whether the present level of performance of manufacturing firms are adequate for their existence. iv. It is also hoped that the study would be a guide for future decision-makers and serve as a benchmark for future research students in the field of production cost control. 1.4 RESEARCH HYPOTHESIS
As regards the research, the writer has put forward these hypotheses.
H0: Careful purchase, handling and storage of materials do not lead to efficiency in the workflow in manufacturing firms. H1: Careful purchase, handling and storage of materials lead to efficiency the work flow in manufacturing firms
H0: Effective and efficient analysis and control of cost of production does not lead to higher profitability in manufacturing establishments.
H1: Effective and efficient analysis and control of cost of production lead to higher profitability in manufacturing establishments.
H0: The problem of failure in the management and control of cost of production is as a result of bad management.
H1: The problem of failure in the management and control of production is not as a result of bad management.
1.5 SIGNIFICANCE OF THE STUDY Since production cost constitutes a major proportion of manufacturing firms operating cost, the study interded to be of benefit to manufacturing establishments and to Innoson company (Nig) limited in particular. It is hoped that, it will go a long way to enhance the effective and efficient control production cost so as to enable management to stay in business. Following the completion of this work and the result made available to management of the manufacturing firms will be in a position to reduce production cost to the minimum level in order to achieve their desire profit motive. In addition, the study will be of benefit to other decision makers and future research scholars carrying on research work on related or the same problem.
