The University of Dodoma

University of Dodoma Institutional Repository http://repository.udom.ac.tz

Business Master Dissertations

2013

Analysis of performance of cost volume

profit (CVP) analysis in manufacturing

companies in Tanzania: a case of

Tanzania Portland Cement Company (TPCC)

Ndongolo, Rahabu P

The University of Dodoma

Ndongolo, R.P. (2013). Analysis of performance of cost volume profit (CVP) analysis in

manufacturing companies in Tanzania: a case of Tanzania Portland Cement Company (TPCC).

Dodoma: The University of Dodoma

http://hdl.handle.net/20.500.12661/1751

Downloaded from UDOM Institutional Repository at The University of Dodoma, an open access institutional repository.

ANALYSIS OF PERFORMANCE OF COST VOLUME PROFIT (CVP)

ANALYSIS IN MANUFACTURING COMPANIES IN TANZANIA - A CASE

OF TANZANIA PORTLAND CEMENT COMPANY (TPCC))

Rahabu Philip Ndongolo

Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of

Master of Business Administration of the University of Dodoma

The University of Dodoma

October, 2013

i

CERTIFICATION

The undersigned certification that I have read and hereby recommend to the senate

for acceptance, a dissertation entitled; Analysis of Performance of Cost Volume

Profit (CVP) Analysis in Manufacturing Companies in Tanzania - a Case Of

Tanzania Portland Cement Company (TPCC)) in a partial fulfillment of the

requirement for the degree of Masters of Business Administration (MBA) of the

University of Dodoma.

…………………………………………

Professor Inderjeet Singh Sodhi

(SUPERVISOR)

Date………………………….

ii

DECLARATION AND COPYRIGHT

I, Rahabu Philip Ndongolo hereby proclaim that this dissertation is an outcome of

my personal research work with the exception of the literature acted, which served as

a source of information. This work is in no way a duplicate in any party or in whole

of a work ever presented for the award of a degree or publication. I further confirm

that works by other authors, which were used as references and resource material

have been acknowledged.

Signature ……………………………….

(HD/UDOM/169/T.2010)

This dissertation is a copyrighted material under the author, the copyright Act of

1999 and other national and international acting. In that behalf, none of the material

of this work may be reproduced in full or part, stored in any retrieval system, or

transmitted in any form or by any means without prior written permission of the

Directorate of Post Graduate Studies on behalf of both the author and the University

of Dodoma.

iii

ACKNOWLEDGEMENT

Magnificence, respect, brilliance, perfectibility, sovereignty and celebrity are

credited unto the Almighty God who in his immeasurable affection steered me to the

successful completion of this study. Wholeheartedly, I am in meagreness of the

words to express my indebtedness to him.

This dissertation would not have been possible without the guidance and the help of

several individuals who in one way or another contributed and extended their

valuable assistance in the preparation and completion of this study.

First and foremost, I would like to reveal my utmost gratitude to Professor

INDERJEET SIGH SODHI for his tireless, perfectly, sincerity and encouraging

supervision. I also admirably express my gratitude to Dr. AME for his

encouragement and guides on the preparation of and completion of this report

together with the management and all staff of the University of Dodoma (UDOM). I

am thankful to management and other staff of TPCC for consenting me to collect

data at their company.

More specifically, to my lovely husband Wilbert Fabian for his delightful support

and encouragement and lovely sons Dickson and David for keeping me busy but

pleased. To my parents Mr. and Mrs. Kalugira for their prayers and encouragement,

may God bless them! Finally, is the heartfelt thanks to all my wonderful friends

Sylvestry January, Annastanzia Majenga, Khalid Karabaki and Frank Mkomochi for

their contribution in my studies.

iv

DEDICATION

This study is dedicated to my cherished husband Mr. Wilbert and my children

Dickson and David for their endless love, encouragement and support for

accomplishment of this work.

v

ABSTRACT

This paper presents the study on the subject of the analysis of performance of Cost

Volume Profit (CVP) analysis in manufacturing companies in Tanzania, a case of

Tanzania Portland Cement Company. Cost volume profit analysis is a model which

is used to plan profit. The general objective of this study was to determine if CVP

can assist management in formulating pricing policies by projecting the effect of

different price structures on cost and profit and to highlight the usefulness of CVP

analysis in manufacturing companies in Tanzania. Specifically, this study desired to

understand the relevancy and efficiency of Cost Volume Profit analysis as a

decisions model in helping manufacturing business to face the challenges caused by

the ever changing business environment predominantly in Tanzania, as policy

makers in making relevant policies.

A case study survey type of research was used in which a sample from the target

population was selected as a source of information needed to achieve researcher‟s

objectives. Consequently, random probability sampling and non-random sampling

were selected. This study included both qualitative and quantitative data. Thus, the

researcher collected data by administering a questionnaire along with interviews to

pave the way for easy analysis of data. Focus group discussion was also conducted

for top management team and employees who are working in management

accounting unit as well as production manager.

The analysis showed that, CVP analysis, though it is a very useful tool for decision

making, is based upon certain assumptions which can rarely be completely realized

vi

in practice. This leads managers and policy makers to forget about the usefulness of

the model and conclude that CVP is not effective and efficient technique for decision

making. In presented enterprise, CVP analysis seemed to be not well known and

hence not applied for managers to find out and decide what to do to improve business

and get planned values of certain indicators.

Due to competition and complexity of the structure of production, traditional

management accounting techniques are not giving the fruitful result to response to

the keen competition. Thus, manufacturing organizations have to adopt advanced

management accounting techniques. Therefore, policy makers should pave the way

for policy implanters to select the model for decision making and test the sensitivity

of the model with alternative scenarios and judge which outcome best describes their

beliefs about the future. To help managers make better decisions, accountants should

evaluate the quality of the techniques they use, given the organizational setting and

decisions to be made.

vii

TABLE OF CONTENTS

Title ……………………………………………………………………………. i

Certification …………………………………………………………………… ii

Declaration and Copyright…………………………………………………….. iii

Acknowledgement……………………………………………………………… iv

Dedication ……………………………………………………………………… v

Abstract ………………………………………………………………………… vi

Table of Contents …………………………………………………………......... viii

List of Table …………………………………………………………………… xiv

List of Figure …………………………………………………………………. xv

List of Abbreviations ………………………………………………………… xvi

CHAPTER ONE: GENERAL INTRODUCTION…………………………… 1

1.0 Introduction…………………………………………………………………. 1

1.1 Background to the Study ………………………………………………….. 1

1.1.1 CVP Analysis; an Overview……………………………………………… 1

1.1.2 Economists versus Accountants view of CVP Analysis…………………. 2

1.2 Statement of the Problem ………………………………………………… 4

1.3 Objectives of the Study…………………………………………………… 8

1.3.1 General Objective ………………………………………………………. 8

1.3.2 Specific Objectives ……………………………………………………… 8

1.4 Research Questions ……………………………………………………….. 8

1.5 Significance of the Study …………………………………………………. 9

1.6 Scope of the Study ………………………………………………………… 9

1.7 Limitations of the Study …………………………………………………… 11

viii

1.8 Conclusion ………………………………………………………………… 12

CHAPTER TWO: LITERTURE REVIEW ………………………………. 13

2.0 Introduction ………………………………………………………………. 13

2.1 Theoretical Review of Literature………………………………………… 14

2.1.1 The Concept of Cost Volume Profit (CVP) Analysis ……………….... 14

2.1.2 Definitions of Key Terms ……………………………………………… 15

2.1.2.1 Cost…………………………………………………………………… 15

2.1.2.2 Volume ………………………………………………………………. 15

2.1.2.3 Profit ………………………………………………………………….. 16

2.1.2.4 Break-Even Point ……………………………………………………... 16

2.1.2.5 Margin of Safety ……………………………………………………… 17

2.1.2.6 Degree of Operating Leverage ………………………………………… 17

2.1.3 Cost Volume Profit Chart ……………………………………………… 18

2.1.4 Theories Related to CVP ……………………………………………….. 19

2.1.4.1 Theory of Cost………………………………………………………… 20

2.1.4.2 Theory of Production …………………………………………………. 22

2.1.4.3 Pricing Theory ………………………………………………………… 23

2.1.4.4 Theory of the Firm …………………………………………………… 23

2.1.4.5 Theory of Constraints …………………………………………………. 24

2.1.5 Factors Affecting Cost Volume Profit Analysis ………………………… 26

2.1.5.1 Basic Constituents ……………………………………………………… 26

2.1.5.2 Income Statement ………………………………………………………. 27

2.1.5.3 Contribution Margin …………………………………………………… 28

2.1.5.4 Fixed Costs …………………………………………………………… 28

ix

2.1.6 Challenges Facing Manufacturing Companies When Using CVP Analysis for

Decision Making ……………………………………………………………… 29

2.1.6.1 Linearity of Total Revenue and Total Cost Schedule ……………….. 29

2.1.6.2 Similarities to Standard Economic Model ……………………………. 29

2.1.6.3 Focus on Revenue and Operating Expenses ………………………….. 30

2.1.6.4 Wealth Impacts of CVP Decisions ……………………………………. 31

2.1.7 CVP Analysis and the Modern Manufacturing Firms …………………… 31

2.1.7.1 Cost Structure ………………………………………………………….. 31

2.1.7.2 Technology and Competition ………………………………………….. 32

2.1.7.3 Strategic Planning ……………………………………………………… 32

2.1.8 Budgeting and CVP Analysis …………………………………………… 33

2.1.9 CVP as Performance Evaluation Tool …………………………………… 34

2.2 Empirical Literature Review ………………………………………………. 35

2.3 Knowledge Gap ……………………………………………………………. 40

2.4 Critical Review of Literature………………………………………………. 40

2.4.1 Criticisms of Studies by Researchers …………………………………… 40

2.4.2 Criticisms of CVP ……………………………………………………….. 42

2.5 Conceptual Framework of the Study ………………………………………. 44

2.6 Relevance of Literature …………………………………………………….. 47

2.7 Conclusion …………………………………………………………………. 50

CHAPTER THREE: RESEARCH METHODOLOGY…………………… 51

3.0 Introduction ……………………………………………………………….. 51

3.1 Research Design ………………………………………………………….. 51

3.2 Population ……………………………………………………………… 52

3.3 Sampling and Sampling Techniques …………………………………… 52

x

3.3.1 Sample Size …………………………………………………………… 54

3.4 Data Collection Methods ………………………………………………… 55

3.4.1 Primary Data …………………………………………………………… 55

3.4.2 Secondary Data ………………………………………………………… 55

3.4.3 Data collection Instruments ……………………………………………. 55

3.4.3.1 Questionnaire …………………………………………………………. 56

3.4.3.2 Interview ……………………………………………………………… 57

3.5 Data Analysis …………………………………………………………….. 58

3.6 Reliability and Validity of the Study …………………………………….. 58

3.6.1 Reliability ………………………………………………………………. 58

3.6.2 Validity …………………………………………………………………. 59

3.6.3 Achieving Validity and Reliability ……………………………………. 59

CHAPTER FOUR: STUDY FINDINGS, ANALYSIS AND DISCUSSION 61

4.0 Introduction ……………………………………………………………….. 61

4.1 Features of Respondents …………………………………………………… 62

4.1.1 Gender Parity ……………………………………………………………. 62

4.1.2 Level of Education ………………………………………………………. 62

4.1.3 Work Experience ………………………………………………………… 63

4.2 Historical Background of the Company …………………………………… 64

4.3 Objective One: General Understanding of Cost Volume Profit Analysis … 65

4.3.1 CVP Analysis Awareness ……………………………………………….. 65

4.3.2 Linearity of Costs and Revenue ………………………………………… 65

xi

4.3.3 Drivers of Costs …………………………………………………………. 66

4.3.4 Separation of Costs into Fixed and Variable Categories ………………… 67

4.3.5 Factors Affecting CVP Analysis ………………………………………… 69

4.3.6 Factors affecting CVP the Most ………………………………………. 70

4.4 Second Objective: CVP Analysis and Related Challenges ……………… 71

4.4.1 The Use of CVP Analysis in Planning and Control …………………….. 71

4.4.2 Planning and Control Problems ………………………………………… 71

4.4.3 CVP Analysis in Long-Term Planning …………………………………. 73

4.5 Third Objective: Applicability of Breakeven Analysis in Modern Manufacturing

Firms……………………………………………………………………………. 73

4.5.1 Capital or Labour Intensive Business …………………………………….. 74

4.5.2 Price Determinants and CVP and Competition ………………………..... 75

4.5.3 CVP and Risks …………………………………………………………... 76

4.6 Objective Four: Budgeting and CVP Analysis ………………………….. 77

4.6.1 Cost Behaviour in Budgeting ………………………………………… 77

4.6.2 Monitoring With Budget ……………………………………………...... 78

4.6.3 Budgeting and the Company‟s Business Pattern …………………….... 79

4.7 Objective Five: Performance Evaluation With CVP Analysis…………… 80

4.7.1 Performance Evaluation …………………………………………………. 80

4.7.2 Bases for Performance Evaluation ………………………………….. 81

4.7.3 Effectiveness and Efficiency of CVP ………………………………. 82

4.8 Summary of Data analysis ……………………………………………...... 83

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

………………………………………………………………………………. 84

xii

5.0 Introduction ……………………………………………………………… 84

5.1 Summary …………………………………………………………………. 84

5.2 Conclusion ……………………………………………………………….. 86

5.3 Recommendations ………………………………………………………... 88

5.3.1 Recommendations to Policy Makers …………………………………. 88

5.3.2 Recommendations to Managers ……………………………………….. 89

5.4 Areas for Future Studies ………………………………………………… 93

REFERENCES …………………………………………………………… .. 94

APPENDIX I: QUESTIONNAIRE ……………………………………… 103

xiii

LIST OF TABLES

Table 1: Profile of respondents …………………………………………….. 54

Table 2: Level of Education ………………………………………………. 62

Table 3: Work experience ………………………………………………… 64

Table 4: Factors Influencing CVP ……………………………………………. 68

Table 5: Factor Affecting CVP The Most ………………………………….. 69

Table 6: Capital or Labour Intensive Business ……………………………. .. 74

Table 7: Price Determinants and CVP and Competition …………………. 76

Table 8: Monitoring with budget …………………………………………… 78

Table 9: Performance Valuation Methods …………………………………… 80

Table 10: Bases for Performance Evaluation ………………………………… 81

xiv

LIST OF FIGURES

Figure 1: CVP Analysis Chart ……………………………………………… 18

Figure 2: Profit Volume Chart …………………………………………….. 19

Figure 3: Conceptual Framework for Variables of the Study ………………. 47

xv

LIST OF ABBREVIATION

ABC – Activity Based Costing

BEP – Break Even Point

CVP – Cost Volume Profit

DOL – Degree of Operating Leverage

EAC - East African Community

EVA - Economic Value Added

JIT – Just-in-Time

NPV- Net Present Value

ROI – Return on Investment

SP – selling price

SPSS – Statistical Package for Service Solution

TFC – Total Fixed Costs

TOC - Theory of Constraints

TPCC – Tanzania Portland Cement Company

TQM – Total Quality Management

UCM – Unit Contribution Margin

VC – Variable Cost

1

CHAPTER ONE

GENERAL INTRODUCTION

1.0 Introduction

This chapter conveys the universal outline of the study on the subject of the analysis

of performance of Cost Volume Profit (CVP) analysis in manufacturing companies in

Tanzania, a case of Tanzania Portland Cement Company (TPCC). It commences by

depiction of the background to the study problem, followed by the statement of the

problem, subsequent to which it presents the research objectives and research

questions. The chapter also briefly explains the significance of the study, explaining

how important the study in knowledge is, managerial impact and contributions to

personal understanding of the researcher and scope of the study. It ends up by

presenting the limitations of the study.

1.1 Background to the Study

1.1.1 CVP Analysis; an Overview

Cost volume profit analysis is a model which is used to plan profit. The basic

assumption made is that, cost volume and profit has linear relationship. It is used to

measure the economic characteristics of manufacturing a proposed product. A critical

part of CVP analysis is the point where total revenue equals total costs (Duncan,

1996). At this break-even point (BEP), a company will experience no income or loss.

This BEP can be an initial examination that precedes more detailed CVP analysis.

Based on accounting data, the CVP model is used to determine the sales quantity

needed to break even, as well as the sales quantity required to earn a desired profit or

2

profit margin. Managers then compare a product's expected sales with the sales

quantities required to break even and/or earn a target profit margin to determine

whether the product should be produced (Duncan, 1996).

Cost-volume-profit, like all financial models, is based on a set of simplifying

assumptions that reduces the complexity of a resource allocation decision to make

decision making more tractable. These assumptions will be outlined in the literature

review chapter. To understand a financial model and its usefulness, its assumptions

and their role in a decision must be understood, that is, the reliability of the results

from CVP analysis depends on the reasonableness of the assumptions.

One of the features useful for decision making, is the ability to display the

information in different methods, one of these is the Margin of safety. This is the

difference between the expected sales and break even sales, expressed as a percentage

of the expected sales. It shows management the level that sales can fall by before the

company‟s revenue falls below the breakeven point (Researcher, 2013).

1.1.2 Economists versus Accountants view of CVP Analysis

There are many ways that CVP analysis can be useful for decision making. It is

important to distinguish between the different applications of the Economists and

Accountants interpretations, as well as other factors involved in decision making

(Lucey, 1996). The economist‟s interpretation of the CVP is based on two main

assumptions, which explain the shape of the cost and revenue curves.

The first assumption, which affects the revenue, is that the firm is competing on price

competition; this means that in order to increase sales, the firm must reduce the

3

marginal selling price of the product. This causes the firm‟s revenue curve to level

off, as the marginal revenue falls to zero (Drury, 2004).

According to Burch (1994), the second assumption is based on the firms cost,

economies and diseconomies of scale. The firm‟s economies of scale cause the

variable cost per unit to decrease as production increases. This can be due to any of

the economies of scale, such as purchasing, where a discount for bulk buying is

received, managerial, where managers can become more specialised, financial where

the firm is offered lower interest rates as there is a lower risk of lending.

It is important to understand that Economists are trying to most accurately model real

world situations, rather than create a tool for management decision. Economists argue

that lowering selling price acts as a catalyst to increasing demand and thus as sales

volumes increase so will variable costs (Chesbrough, H. and Rosenbloom, R.S. 2002).

Proponents of the accounting model argue that it is not intended to provide a precise

representation of total revenue and cost functions throughout all levels of activity.

The objective of the accountant‟s CVP model is to represent an approximation of

revenue and cost behaviour over the relevant range in the short term.

Managers may wish to extend the CVP model to cover longer term decisions. This

needs them to be aware of the long term behaviour of fixed costs. In the long term,

firms will have a greater control over fixed costs, which will give the firm‟s fixed cost

line a step function. Meigs, (1998) states that, other factors will also affect the firm‟s

revenue and cost curves, such as advertising strategies, changes in political

environments, social, economic, and legal factors, such as a change in tax rate. These

factors cannot easily be planned for and are not easily shown in long term CVP

4

analysis, which is the main reason that CVP cannot accurately model long term

production.

In the real world, firms will be producing multi products, and spreading the overhead

costs across each of these products. A firm may wish to alter the CVP analysis to

reflect their product mix. This is done by grouping production into batches. The

batches revenue and variable costs will be defined as the total of the products in the

batch (Researcher, 2013). The values for the batch are then applied to the CVP in the

same way as a single product. The Accountant‟s interpretation of the CVP analysis, as

shown by the underlying assumptions, will allow managers to develop a more

relevant understanding of the information, so that it can be used more efficiently in

decision making. If managers tried to use the economists Cost Volume Profit model,

the cost of gathering and interpreting the data would be high, as well as making the

information more difficult to understand and less reliable (Kaplan, R. and Atkinson,

A., 1998).

Thus, Economists and accountants have diametrically opposite views of cost-volume

profit (CVP) behaviour but only accountants have a CVP model that is appropriate for

assisting management with decision making (Drury 2004).

1.2 Statement of the Problem

Running a successful business requires proficient navigation of the many choices

created by an ever changing market place (Meigs, 1998). This implies that, to have a

strong and successful business, managers need to have a clear understanding of the

financial impact that the most basic business decisions may have.

5

CVP analysis is a useful forecasting as well as managerial control tool. It is one of the

fundamental financial analysis tools for ascertaining the underlying profitability of a

business. Its primary value is in highlighting the effects of different levels of activity

on profit and, combinations of fixed and variable costs of production. The model not

only incorporates these admittedly important variables but recognizes the fixed and

variable nature of capital costs (Brigham, 1995). It includes a set of problem solving

techniques and procedures, based on understanding the characteristics of company

costs evolution models. In a general sense, it provides a comprehensive financial

overview of the planning process (Horngren, Datar, and Foster, 1994). That overview

allows managers to examine the possible impacts of a wide range of strategic

decisions. And such decisions can include crucial areas such as pricing policies,

product mixes, market expansions or contractions, outsourcing contracts, idle plant

usage, discretionary expense planning and a variety of other important considerations

in the planning process (Horngren et al, 1994).

The CVP analysis is useful in taking decisions related to installing manufacturing

capacity and selling prices taking in to consideration that different levels of

manufacturing capacity display different structure of fixed and variable components

of manufacturing cost, and the impact of difference between selling price and variable

cost on contribution for recovering the fixed costs and making profit (Drury, 2004).

However, the consequence of identifying and interpreting the underlying assumptions

of Cost Volume Profit (CVP) analysis rest on the practical application of it. When

CVP was developed, manufacturing firms had different cost structures than modern

manufacturing firms. Modern firms have a higher level of costs that remain constant

6

with changes in output, partly because modern firms are more capital intensive, and

partly because most of their labor cost is fixed (Johnson, H. Thomas, 1981). And cost

structures vary extensively among industries and between firms within an industry.

In addition, an organization‟s cost structure has a substantial effect on the sensitivity

of its profits to changes in volume. Operating leverage describes the extent to which

an organization‟s cost structure is made up of fixed costs. Operating leverage can

vary within an industry as well as between industries (Researcher, 2013).

Furthermore, as the manufacturing environment changes, business cost structure also

changes, the conventional cost behavior based on single action shows narrow-minded,

and the basic assumptions also limits the practical application of CVP analysis. CVP

is perceived to be a one-period model of a product's profitability, (Mc Waters et al,

2001) although the product may have an economic life of several years.

Likewise, there are factors that influence the changes in management accounting

practices within some organisations. Otley and Berry (1980) made reference to some

systems as open, that is, there is a continuous cycle of resources that are inputs which

moves from the external environment. It is a common belief that such changes will

have an influence on the selection of the appropriate management accounting

practices within any organisation. Some researchers have commented that such

changes may originate due to different settings of both economic and cultural

environments. Most of the research focused on changes in management accounting

practices, primarily in countries such as South Africa and Canada (e.g Luther &

Longden, 2001). Nevertheless, some researchers noted what is often taught in schools

is far different in the world of work and therefore creates a breach in knowledge

7

between the practical and the theory. Johnson and Kaplan (1987) argued that

management accounting has not changed over the past years. But, Libby and

Waterhouse (1996) were convinced that there were changes. Burns et al. (1999)

further argued that there is evidence that management accounting practices have

changed over the last decade in a developed country such as the United Kingdom.

There are some published reports in Africa such as “Cost Information and Strategic

Planning in the Egyptian Private Sector” written by Mohamed Elshahat in 2006. On

his report Mohamed (2006) explained a little on CVP as a tool for decision making

with its weaknesses and some more published in developed countries. But, currently

there is no any published report in Tanzania talking anything on CVP as a model for

decision making and there is no research study conducted on this issue. So

specifically, this study desires to understand how efficient Cost Volume Profit

analysis, in helping managers to is make decisions which, in turn, enable the

manufacturing business to face the challenges caused by the ever changing business

environment particularly in Tanzania, as well as it would help the policy makers to

make some relevant policies in this aspect.

1.3 Objectives of the Study

1.3.1 General Objective

Main purpose of this study is to determine if CVP can assist management in

formulating pricing policies by projecting the effect of different price structures on

cost and profit and to highlight the usefulness of CVP analysis in manufacturing

companies in Tanzania.

8

1.3.2 Specific Objectives

The specific objectives of this study are as follows:

1. To identify the factors affecting CVP analysis

2. To determine the challenges facing manufacturing companies when using

CVP analysis for decision making

3. To determine the relevance of CVP in modern manufacturing firm‟s decision

making.

4. To find out if CVP analysis is helpful in setting up flexible budget which

indicates cost at various levels of activities.

5. To find out if CVP analysis is useful in evaluating performance for the

purpose of control.

1.4 Research Questions

1. What are the factors affecting CVP analysis?

2. What are the challenges facing manufacturing companies when using CVP

analysis for decision making?

3. Is CVP analysis relevant to modern manufacturing firm‟s decision making?

4. What is the contribution of CVP in setting up flexible budget?

5. Can CVP assist in evaluating performance for the purpose of control?

1.5 Significance of the Study

CVP analysis is an important theory in modern management accounting. This

analysis provides useful information for decision-making in the management of a

company. But its conclusions are made in some strict assumptions, and we cannot be

sure that the conclusions are also set up in real environment. Those simplifications

9

and restrictions impinge on the reality and relevance of the analytical model, so

attempts to improve them will involve releasing some of their underlying assumptions

or broadening their scope.

Because in the modern environment of business, a business administration must act

and take decisions in a fast and accurate manner, gaining a better understanding of

costs and volume via CVP analysis can assist management in locating areas of

potential efficiency improvements. Thus studying whether the CVP conclusions are

justifiable in real environment will be worth for business policies formulation and

personal career improvement to researcher.

1.6 Scope of the Study

CVP is an important financial analysis that helps managers to deal with their routine

problems as well as strategic issues in the course of carrying out their business

activities. Such issues can come up when preparing company budgets, financial plans

or when new sales promotions and other functional decisions are taken. It evaluates

what-if situations that occur in the business.

CVP analysis has wider scope in various managerial decisions making. Various cost

accounting models have been developed within this broad decision framework such

as breakeven analysis, transfer pricing systems and mathematical programming

methods for choosing optimal sales mix and the optimal extend of processing joint

products. Initially all CVP models were deterministic, assuming demand and cost

structures to be known with certainty. However, following the significant

development in the area of economic decision making uncertainty, attempts have

been made to relax the certainty assumption of CVP models.

10

The following are the benefits (functions) of CVP in business;

It is helpful in setting up flexible budgets which indicates cost at various

levels of activities. It assists managers in determining the quantity of products

to be produced to attain desired profits, the quantity of products to be

produced at maximum threshold level, attaining desired profit under different

costs and volume relationship.

In order to ascertain profits accurately, it is essential to ascertain the

relationship between cost and profit on one hand and volume on the other.

CVP analysis helps the business to know its most profitable product(s) or

service(s) among various that the business offers in the market. This aids the

management to focus more on profitable products compared to others. It also

supports the form to know the impact of any variance, due to any reason, on

the profits.

CVP analysis assists in evaluating performance for the purpose of control. It

enables the firm to understand the level of fluctuations it can afford in its

selling price. Whenever firms increase their selling price to increase sales they

must know the new level of sales they have to meet to sustain the desired

profits. It is also essential for the firm to know the bare basic prices(s) that

must be charged for its products from its customer and how to cover any

increase in fixed costs that may arise.

1.7 Limitations of the Study

It is important to mention a few limitations of this study before any conclusion may

be drawn.

11

The study was subject to the normal limitations related with survey research. CVP

analysis is used to provide information for internal reporting purposes. This led to

response bias due to the unwillingness of the respondents to share the accurate

information on the ground of confidentiality. Some of the responses may have been

influenced by the problems of questions understanding and misinterpretation which

resulted in data analysis difficulties.

All research designs can be discussed in terms of their relative strengths and

limitations. The merits of a particular design are inherently related to the rationale for

selecting it as the most appropriate plan for addressing the research problem. The

researcher selected a case study design because of the nature of the research problem.

The case study is basically been faulted for its lack of representativeness and

therefore it involves problems on the issues of reliability, validity, and

generalizability. This is because a case study focuses on a single unit, a single

instance.

Time and budget were also among the limiting factors of this study. This was a self-

sponsored research; therefore the costs associated with the whole study were incurred

by the researcher. Thus the researcher was subject to financial constraints and time

for data collection and analysis.

1.8 Conclusion

This chapter has offered the broad preface of the whole study. It began by giving a

range of aspects with high regard to the idea Cost Volume Profit analysis, contracted

downward to the subject of applicability. Within the problem it has demonstrated how

the interpretation of strict assumptions of CVP analysis impinge on the application of

12

the model and, for this reason the purpose to discover the efficiency of the model in

manufacturing business. In winding up the chapter, the importance, scope and

limitations of the study are specified.

13

CHAPTER TWO

LITERTURE REVIEW

2.0 Introduction

This chapter is dedicated to a review of the most important theoretical, empirical and

critical literature related to the issues of CVP analysis as a planning and control tool

for mangers. Basically, CVP analysis is considered to be the powerful tool mangers

have at their hands for planning and control of the operations of their organizations.

There have been many studies on CVP for decision making as used in organizations a

long time ago. Nevertheless, these studies have not been telling us how competent is

the model in providing managers with the information they require particularly in the

changing business environment.

This chapter has five major parts. The first part discusses the theoretical framework of

CVP analysis. The key terms and assumptions underlying the study as well as its

pictorial presentations are also presented. The second party discusses the empirical

literature review of CVP analysis as used in the planning process in the changing

business environment and the recent tendencies of management thinking basing on

the objectives of the study followed by highlights the conceptual framework of the

study.

14

2.1 Theoretical Review of Literature

2.1.1 The Concept of Cost Volume Profit (CVP) Analysis

CVP analysis is a systematic method of examining the relationship between changes

in activity (that is, output) and changes in total sales revenue, expenses and net profit

(Drury, 2004). It is a mathematical representation of the economics of producing a

product. The relationships between a product's revenue and cost functions expressed

within the CVP model are used to evaluate the financial implications of a wide range

of strategic and operational decisions. Cost-Volume-Profit analysis is a planning tool

which is extremely useful in predicting sales and profit levels given a certain cost

structure (Burch, 1994). Traditional CVP analysis has been applied largely to

manufacturing enterprises which have a tangible product base (for example,

furniture). However, the concept itself is applicable to service enterprises such as

banking, insurance and other financial service industries.

As mentioned earlier, Cost-Volume-Profit analysis, or breakeven analysis as it is

often commonly called, is used largely in the manufacturing sector. According to

Horngren et al (1997), the basic CVP model has the following underlying

assumptions:

1. The behavior of costs and revenues is linear.

2. Selling prices are constant.

3. All costs can be divided into their fixed and variable elements.

4. Total fixed costs remain constant.

15

5. Total variable costs are proportional to volume.

6. Prices of production inputs (for instance, materials) are constant.

7. Efficiency and productivity are constant.

8. The analysis covers a single product or a constant sales mix.

9. Volume is the only driver of costs.

2.1.2 Definitions of Key Terms

The main variables involved in the empirical study to the extent that our study is

concerned are as follows;

2.1.2.1 Cost

In business, cost is usually a monetary valuation of effort, material, resources, time

and utilities consumed, risks incurred, and opportunity forgone in production and

delivery of a good or service. Cost is a sacrifice of resources incurred for a future

benefit or objective (Kapil, 2011). The resources sacrificed are in form of cash or

cash equivalents. It is a resource sacrificed or forgone to achieve a specific objective

(Horngren et al., 1997).

2.1.2.2 Volume

The quantity or number of goods sold or services sold in the normal operations of a

company in a specified (Baumol, 1972). It is the level at which something is heard or

the amount of space that something takes up.

16

2.1.2.3 Profit

The word profit has different meaning to different people. In a general sense profit is

regarded as income accruing to the equity holders (Dwivedi, 2008). To an accountant,

profit means the excess of revenue over all paid-out costs including both

manufacturing and overhead expenses. Economists define profit as a return over and

above the opportunity cost, that is, the income which a businessman might expect

from the second best alternative use of his resources.

2.1.2.4 Break-Even Point (BEP)

The break-even point has its origins in the economic concept of the point of

indifference. From an economic perspective, this point indicates the quantity of some

good at which the decision maker would be indifferent (Dwivedi, 2008) (that is,

would be satisfied without reason to celebrate or to opine). At this quantity, the costs

and benefits are precisely balanced.

Break-even point is where both revenue and costs are equal (Duncan, 1996). It is a

starting point for planning purposes. If sales volume extends beyond break-even point

and if there is positive contribution, each additional unit sold will contribute to profit

at a rate which is equal to unit contribution margin. If sales volume will be below

break-even point, sales volume will not cover annual fixed costs.

BEP = Total fixed costs (TFC)

Unit contribution margin (UCM)

Unit contribution margin = Unit selling price (SP)-Variable cost per unit (VC)

17

2.1.2.5 Margin of Safety

A margin of safety is the difference between break even sales and planned sales. This

difference indicates the degree to which the business is safe from operating at a level

that will result in loss (Drury, 2004).

2.1.2.6 Degree of Operating Leverage

Managers decide how to structure the cost function for their organizations. Often,

potential trade-offs are made between fixed and variable costs. One of the major

disadvantages of fixed costs is that they may be difficult to reduce quickly if activity

levels fail to meet expectations, thereby increasing the organization‟s risk of incurring

losses.

The degree of operating leverage is the extent to which the cost function is made up

of fixed costs (Scarlett, 2005). Organizations with high operating leverage incur more

risk of loss when sales decline. Conversely, when operating leverage is high an

increase in sales (once fixed costs are covered) contributes quickly to profit.

A manager can use the DOL to quickly estimate what impact various percentage

changes in sales will have on profits, without the necessity of preparing detailed

income statements.

The formula for operating leverage is

Degree of operating leverage (DOL) = Contribution margin

Net operating income

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2.1.3 Cost Volume Profit Chart

The information obtained from planning using CVP model may be depicted using the

CVP chart and profit volume chart. Unfortunately none of the two charts succeeds to

show the three parameters of cost, volume and profit in the same chart. We can

therefore prepare both of them so that they can complement one another.

The CVP chart shows the volume of sales on the horizontal axis and the cost and

revenue in the vertical axis as follows;

Figure 1: CVP Analysis Chart

Revenue/cost Total revenue

BEP Profit Total cost

Variable costs

Loss Fixed costs

0 Output

2.1.3.1 Profit Volume Chart

Profit volume chart shows how the volume change influences profit change. When we

examine the CVP chart we find that it does not show this relationship directly. In this

chart x-axis stands for volume of sales and y-axis stands for profit. If sales are zero,

loss will be equal to annual fixed costs.

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Figure 2: Profit Volume Chart

Profit/loss

BEP Profit

0 Output

Loss

2.1.4 Theories Related to CVP

CVP analysis is based on the assumption of a linear total cost function (constant unit

variable cost and constant fixed costs) and so is an application of marginal costing

principles. It is based on the principle of separating variable costs from fixed costs

according to behaviour change in production volume, and is charging only variable

costs (marginal costs) on products whether they are direct or indirect. Lucey (2003)

defines marginal costing as „the accounting system in which variable costs are

charged to cost units and fixed costs of the period are written-off in full against the

aggregate contribution‟.

According to Variable costing provides relevant information for the management

team, and is useful in formulating economic entity's business decisions for the next

period. This method will provide a basis for cost estimates to study the effects of

planned changes in production volume, resulting from changes in economic

20

conditions or open some management actions such as price changes, increase or

decrease in stocks or special promotional activity.

Briefly, the following are the theories which provide the base or supports CVP

analysis:-

2.1.4.1 Theory of Cost

The theory of cost is the model which is most related to CVP. The theory of cost

deals with the behaviour of cost in relation to a change in output (cost-outputs

relation). The basic principle of the cost behaviour is that the total cost increases with

increase in output (Dwivedi, 2008). Such an unassuming statement of a witnessed

fact is of slight theoretical and practical importance. What is significant from a

theoretical and managerial idea of understanding is not the absolute increase in the

total cost but the direction of change in the average cost.

So the method focuses on boosting sales in that size does not allocate fixed costs on

inventory (unfinished products, finished products), but must be covered by the sales

of the period. Also the emphasis is on analysis and attribution of the fixed costs and

attributing the variable costs on the gross margin (Lucey, 1996).The manager has the

obligation to return and maximize margin on variable costs over which fixed costs

will be charged. The margin on variable costs, also called gross profit or contribution

limit is determined as the difference between gross turnover and variable costs

associated with the entire production sold (Vickers, 1997).

21

The margin of variable costs is also called the global margin and it is the sum total

margins on variable costs per product unit set multiplied by the associated production

sold. The unit margin can be determined as the difference between the selling price

and the unit variable cost of product (Scarlett, 2005).

CVP analysis is also predicated on the notion that, in the short run, a relationship

exists between volume, sales revenue, costs and profit. The “short run” in this regard

is a period of one year or less. And during this period, the organization's current

operating capacity becomes the main factor that restricts its output (Robert et al.,

2004). Though some of the organization's inputs can be increased in the short run,

others cannot. For example, it can take a long time to expand the capacity of the

organization's plant and machinery even though additional supplies of unskilled labor

and materials may be obtained on short notice (McWatters, et al., 2011).

Hence, given that the organization's plant facilities cannot be expanded in the short

run, its output will be limited in that period (Meigs, 1998). Furthermore,

organizations may be compelled to operate on relatively constant stock of production

resources in the short run because it also takes time to reduce capacity. In this regard,

sales volume becomes the major area of uncertainty for the affected organizations

because most of the costs and prices for their products will have already been

determined. The implication of this is that organizations‟ short-run profits are most

sensitive to sales volume. A CVP analysis reveals how this sales volume affects

short-run profits (Meigs, 1998).

22

The variation of the conventional CVP model provides more useful information to

management because it focuses on more than operating expenses and sales revenues.

Financial managers have long recognized the importance of including cost of capital

and business risk variables in capital budgeting decisions (Brigham, 1995). Our

model not only incorporates these admittedly significant variables but identifies the

fixed and variable character of capital costs.

The understanding of this theory led the researcher to develop the questions, which,

when responded helped her to conclude whether CVP analysis incorporates more than

costs and revenues when used in decision making (Researcher, 2013).

2.1.4.2 Theory of Production

This is the most basic theory in economics which was developed by Adam Smith and

David Ricardo in the late 18th century. Production theory is a theory which deals with

quantitative relationship, that is, technical and technological relations between input

and output. It also clarifies under what circumstances costs increases or decreases,

how total output behaves when all units of one factor (input) are increased keeping

other factors constant or when all factors are simultaneously changing. How can

output be maximized from a given quantity of resources and how can the optimum

size of output be determined are also the main concern of production theory

(Stewart, 1991).

An input is a good or service that goes into the process of production and output is

any good or service that comes out of production (Dwivedi, 2008). Production

process requires a wide variety of inputs depending on the nature of product. Inputs

23

are categorized as fixed inputs and variable inputs. Theoretically, a fixed factor is one

that remains constant (fixed) for a certain level of output. And a variable input is the

one that changes with the change in output.

This theory enabled the researcher, in the course of her study, try to find out and

come up with the proof of whether CVP analysis is applicable only for short-term

decisions or not (Researcher, 2013).

2.1.4.3Pricing Theory

This theory was developed by Alfred Marshall in the early 20th

century and was

supported by other economists such as David Ricardo and Adam Smith. Price theory

has always been at the heart of economic theory and profit maximization has been the

most important assumption on which economists have built price and production

theories. This assumption has however, been strongly questioned and alternative

hypothesis suggested. Price theory explains how price is determined under different

kinds of market conditions; when price discrimination is desirable, feasible and

profitable; and to what extend advertising can be helpful in expanding sales in a

competitive market (Dwivedi, 2008). Thus price theory can be supportive in

determining the price policy of the firm. Price and production theories together, in

fact assist in shaping the optimum size of the firm.

Therefore, this study also took into consideration the statement given by Kaplan and

Atkinson in 1998, stating that “If managers tried to use the economists Cost Volume

Profit model, the cost of gathering and interpreting the data would be high, as well as

making the information more difficult to understand and less reliable”.

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2.1.4.4 Theory of the Firm

The economic question of the firm is old. Adam Smith discussed firms in The Wealth

of Nations (1776) and established that they, in the sense of "manufactures," were

more efficient in producing than individual, self-employed craftsmen and labour

workers. Managerial theories of the firm, as developed by William Baumol (1959 and

1962), is microeconomic concept founded in neoclassical economics that states that

firms (corporations) exist and make decisions in order to maximize profits.

Businesses interact with the market to determine pricing and demand and then

allocate resources according to models that look to maximize net profits (Baumol,

1959).

The concept of a business model facilitates analysis of the way in which a firm

derives economic value from a newly developed technology. Indeed Chesbrough and

Rosenbloom (2002) have argued that it is the business model adopted, more so than

the technology itself, which is critical to the success of the commercialisation of new

technology. The concept is concerned with how the firm defines its competitive

strategy through the design of the product or service it offers to its market, how it

charges for it and what it costs to produce. How it differentiates itself from other

firms by the nature of its value proposition. It also describes how the firm integrates

its own value chain with that of other firms in the industry‟s value networks.

The review of this theory assisted the researcher to impose questions which helped

her to determine whether CVP analysis is still relevant in this dynamic and

competitive world of business.

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2.1.4.5 Theory of Constraints

The Theory of Constraints (TOC) is a series of decision making techniques first

created by Dr. Eliyahu M. Goldratt beginning around 1980 and later applied and

augmented by a number of others. An earlier propagator of the concept was Wolfgang

Mewes

in Germany with publications on power-oriented management theory

(Machtorientierte Führungstheorie, 1963). There are several works which provide

reviews of TOC's history and development its major components applications

(Noreen et al, 1995;), and published literature (Mabin and Balderstone, 1999).

The Theory of Constraints has been applied to production planning, production

control, project management, supply chain management, accounting and performance

measurement, and other areas of business as well as such not-for-profit facilities as

hospitals and military depots ((Goldratt, 2008). It has also been applied to decision

making in educational settings.

The Theory of Constraints states that constraints determine the performance of a

system. A constraint is anything that prevents a system from achieving a higher

performance relative to its goal (Schleier, 2010). The Theory of Constraints was first

applied to business systems. Dr. Goldratt defines the goal of a for-profit business as to

make more money now and in the future. This definition is in keeping with the

traditional definition of the goal of a business which is to maximize the owners‟ or

stockholders‟ wealth. Constraints may be resource constraints such as a person or

department that cannot keep up with market demand (Goldratt, 1995).

The Theory of Constraints is perhaps the most advanced operations management

philosophy in existence (Goldratt, 2008). Its usefulness has been widely proven. It has

26

been used in conjunction with Lean and Total Quality Management and may help to

focus these initiatives on the organization‟s constraints to increase their impact.

The importance of this theory is on finding out if CVP analysis can incorporate all

relevant factors which affect business in decision making.

2.1.5 Factors Affecting Cost Volume Profit Analysis

Cost-volume-profit analysis involves a study of various factors that affect profit and a

study of their interrelationship. It is a technique used for measuring the functional

relationships between the major factors affecting profits; and for determining the

profit structure of the firm. It is used to determine how changes in costs and volume

affect a company's operating income and net income (Saxena and Vashist, 2007).

Therefore the key factors that affect the profit of a business are the ones which affect

CVP analysis. Such factors are the selling price of the products, volume of sales and

cost of production.

2.1.5.1 Basic Constituents

CVP analysis consists of five basic constituents that include: volume or level of

activity, unit selling price, variable cost per unit, total fixed cost, and sales mix. Cost-

Volume-Profit Analysis also consists of the CVP income statement, break-even

analysis, margin of safety, target net income and changes in business environment.

These components are vital to determining the success of a company through profit

margins (Lecture notes).

The five basic components interdepend based on well thought out assumptions in a

CVP analysis. The level of activity shows the costs and revenues display relevance in

27

range in activity, activity levels are displayed as diverse dimension bases in a

company. The variable cost per unit is determined by dividing the change in total cost

by the high minus low activity level. Total fixed costs remain the same and do not

change as activity may change. The sales mix indicates a combination of products

sold in a CVP (Saxena et al., 2007). The five basic components help define profit in a

CVP analysis.

2.1.5.2 Income Statement

Aside from the five basic components of a CVP analysis, there are many other

important factors that display a company‟s success. A CVP income statement

evaluates costs and expenses in a period and also reports the contribution margin. In a

CVP analysis there is a break even analysis that determines a point where total

revenues equal total costs, also known as the break-even point. The break-even point

can be found using a mathematical equation, finding the point on a CVP graph or

simply by using the contribution margin technique (Scarlett, 2005).

A margin of safety is also displayed, which is the amount of sales at a break-even

point and the actual or expected sales for the company. According to Robert et al.,

(2004), the income is projected for certain products, this is known as the target net

income. The Cost-Volume-Profit Analysis then closes with reporting changes in the

business environment and revisits the CVP income statement to review profit analysis

and projections over a period of time.

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2.1.5.3 Contribution Margin

Another important aspect of a Cost-Volume-Profit Analysis is the contribution

margin. The contribution margin is the revenue remaining after deducting variable

costs. McWatters, et al. (2011) states that if the unit selling price increases, the

contribution margin per unit will decrease provided the unit variable costs remain the

same and do not also rise. If the unit variable costs rise with the selling costs, the

contribution margin might remain the same or may not show as much of an increase.

Contribution margin ratios are sometimes more preferred in a CVP analysis. A

contribution margin ratio is a percentage of sales contributing to a company‟s net

income. The contribution margin per unit divided by the unit selling price gives out

the contribution margin ratio (Magee, 1975). If one of the components of the

contribution margin ratio changes, the company‟s net income will also change. If the

sales increase, then the net income will increase. By the sales increasing, the unit

selling price can be decreased and increase the contribution margin to the company.

The contribution margin can improve the net income of the company but is very

dependent on the sales of a company. There are many factors that determine the net

income of a company, and the main factors are all displayed in a Cost-Volume-Profit

Analysis income statement (Magee, 1975).

2.1.5.4 Fixed Costs

Fixed costs are another factor to consider in a Cost-Volume-Profit Analysis. Fixed

cost by itself does not increase or decrease, but a fixed cost per unit may show a

change in rates. If the fixed price per unit decreases then the items produced will

decrease, and the sales of the item will be lowered until there is no more of the

29

product to sale (Luther, et al., 1998). The decline in the production of candy canes

will eventually thin out to nothing. A change in fixed costs can alter the sale of a

product from any company.

2.1.6 Challenges Facing Manufacturing Companies When Using CVP Analysis

for Decision Making

The challenges facing decision makers in the practical application of CVP relate to its

basic underlying assumptions. Economists (Vickers, 1997; Machlup, 1955) have been

predominantly critical of those assumptions. Their disapprovals take various forms,

but they all arise from CVP's departures from the ordinary supply and demand models

in price theory economics.

2.1.6.1 Linearity of Total Revenue and Total Cost Schedule

Possibly the most basic dissimilarity between CVP analysis and price theory models

is that CVP disregards the curvilinear nature of total revenue and total cost schedules.

Consequently, it assumes that changes in volume have no effect on elasticity of

demand or on the efficiency of production factors. Managerial accountants recognize

these economic critiques, but they believe nonetheless that CVP analysis is a very

useful initial analysis of strategic decisions (Horngren et al., 1994).

2.1.6.2 Similarities to Standard Economic Model

The supplementary condemnations of the underlying nature of CVP analysis stems

from its similarities to standard economic models, rather than its differences. Alike to

standard economic price theory models, basic CVP analysis usually assumes, among

other things, the following: single-stage, single-product manufacturing processes;

30

simple production functions with one causal variable; cost categories limited to only

variable or fixed; and data and production functions vulnerable to certainty

predictions (Chen et al, 2002). Further, CVP analysis is naturally restricted to one

time period in each case.

The shortcomings of CVP look like discouraging, but CVP is flexible enough to

overcome them all, if necessary and appropriate. Nonlinear and stochastic CVP

models involving multistage, multi-product, multivariate, or multi-period frameworks

are all possible, although a single model embracing all of those extensions would

appear a fundamental departure from the entire idea of CVP analysis, its basic

simplicity (Schneider, 1992). Universally, the durability and reputation of CVP

analysis definitely reflects the willingness of its users to "live with" the shortcomings

revealed by criticisms of its basic nature.

2.1.6.3 Focus on Revenue and Operating Expenses

The main concern lies on restricted focus of CVP on only sales revenue and operating

expenses. That drawback can leave some very significant aspects of strategic

decisions overlooked. Schneider (1992), for example, suggests that the scope of CVP

analysis ought to be widened to include the impact of managerial compensation

schemes on target profit levels. CVP does not measure the impact of the decision on

wealth, it does not incorporate the effect of asset structure changes required by the

decision and it does not acknowledge the risk created by the decision (Magee, 1975).

Some fairly simple extensions of the scope of the basic model can do much to

improve the shortcomings caused by those limitations.

31

2.1.6.4 Wealth Impacts of CVP Decisions

The first restriction of the basic CVP model that should be addressed is the

nonexistence of any dimension of a decision's impact on wealth. The existing CVP

model focuses on the total level of net profits produced by a decision, which may or

may not increase the wealth of the firm (Dwivedi, 2008). The decisive effect of a

specific decision upon wealth rests on the investment in assets necessary to

implement that decision. Though it would possibly be ideal to capture wealth effects

through present value analyses, the main improvement of CVP analysis, its relative

simplicity, would be lessened by the added complexities of present value techniques.

A simpler way to incorporate wealth effects in the CVP model would be to include

the firm's cost of capital in the analysis (Dwivedi, 2008).

2.1.7 CVP Analysis and the Modern Manufacturing Firms

2.1.7.1 Cost Structure

When CVP was developed, manufacturing firms had different cost structures than

modern manufacturing firms. Modern firms have a higher level of costs that remain

constant with changes in output, partly because modern firms are more capital

intensive, and partly because most of their labor cost is fixed. For example, the

supervisor of a machine is paid the same salary if the machine is running at 50% or

75%. Many authors (Kaplan et al., 1998) argue that traditional views of maximizing

contribution are no longer relevant.

32

2.1.7.2 Technology and Competition

In recent years particularly after the wide spread increase of technology in many

sectors, numerous firms have entered the market intending to take high percentage of

the market share. Consequently to compete more in the introduction market some

firms increase their sales regardless of the high price. They sell more at low price to

achieve progress in addition to reducing the inventory of some kinds of products.

According to Mc Watters et al., (2001), in most markets if you want to sell more, you

must lower your sale price. Assuming that one can sell very large quantity at a

constant price is unrealistic. CVP analysis has no explicit assumption of a constraint

in production or sales. The assumption of a constant sales price is probably accurate

only over a narrow range of output levels (Researcher, 2013).

Since its introduction in the 19th century, CVP analysis concept has been used,

enhanced, adjusted and extended in an attempt to reduce or correct for its limitations

and make it applicable to more and more business situations Vickers, (1997).

Hongren et al (2000) asserts that, inspite of its limitations and criticisms, cost-

volume-profit analysis continues to be considered as one of the best ways to focus on

the relationship between cost, volume and profitability.

2.1.7.3 Strategic Planning

Horngren et al. (2000) note that firms across a variety of industries have found the

simple CVP model to be helpful in both strategic and long-run planning decisions.

Furthermore, a survey of management accounting practices indicates that CVP

analysis is one of the most widely used techniques (Garg et al., 2003). However,

Horngren et al. (2000) warn that, in situations where revenue and cost are not

33

adequately represented by the simplifying assumption of CVP analysis, managers

should consider more sophisticated approaches to financial analysis.

2.1.8 Budgeting and CVP Analysis

Business prepares long-term plans and these are transformed into financial plans that

indicate what needs to be done and the financial resources required in accomplishing

it. Budgeting therefore transforms the plan of action into statistics. The budgeting

process is an important piece of the business planning process. It provides managers

with the opportunity to carefully match the goals of the organization with the

resources necessary to accomplish those goals. A well thought-out budget gives the

company a numeric picture of potential income, expenses and profitability (Scarlett,

2005).

According to Bhattacharyya (2011), Cost-volume-profit analysis is helpful in setting

up flexible budget which indicates cost at various levels of activities. A flexible

budget shows budgeted revenue, costs and profits for different levels of business

activity. Thus a flexible budget can be used to evaluate the efficiency of departments

throughout the business even if the actual level of business activity differs from

management's original estimates (McWatters, et al. (2011). The amounts included in a

flexible budget at any given level of activity are based on cost-volume-profit

relationships.

The flexible budget responds to changes in activity, and may provide a better tool for

performance evaluation. It is driven by the expected cost behavior. Fixed factory

34

overhead is the same no matter the activity level, and variable costs are a direct

function of observed activity.

A good financial model works in much the same fashion as flight simulator, allowing

an organization to test the interactions of decisions and economic variables in variety

settings (Hilton et al, 2003). He further argues that financial models should be

designed to have the following characteristics and objectives; (1) Usefulness for

decision making, (2) Accurate and reliable simulator of relevant factors and relations

and (3) Flexible and responsive analysis.

2.1.9 CVP as Performance Evaluation Tool

Performance evaluation has been identified as an important function of management

accounting (Emmanuel et al., 1990). Managers develop a group of measures that

identify changes in performance quality so that employees can determine what needs

to be done to improve performance

Cost management tools are essential to exert control over cost and to appraise

managerial performance in different segments of an organization particularly in

manufacturing organizations. Paulo, (2002) asserts that CVP analyses are useful for

planning and monitoring operations and for motivating employee performance.

Budgets are updated continuously to accommodate management‟s need for

performance evaluation in some settings such as just-in-time (JIT) or total quality

management (TQM) environments (Drury, 2004). This helps managers determine,

very specifically, what the future will hold if variables are altered. For instance,

35

transportation expenses and costs for materials can change. These variable costs can

affect the bottom line. CVP analysis allows the manager to plug in variable costs to

establish an idea of future performance, within a range of possibilities.

Profit analysis refers to the techniques used to generate an overall performance

evaluation from the financial perspective. It is a broader level of analysis than the

standard cost variance analysis for manufacturing costs and includes those variances

as well as several others. It is usually based on a comparison of the actual data with

the budget, but the actual data for the current period can also be compared with the

actual data from a previous period (Lucey, 1996).

Managers constantly monitor existing operations of their organizations to find out if

they would achieve the desired levels of profit. For this purpose, a number of tools are

available; one such tool is Cost-Volume-Profit (CVP) analysis (Emmanuel et al.,

1990).

When performance evaluation is based on a static budget, there is little incentive to

drive sales and production above anticipated levels because increases in volume tend

to produce more costs and unfavorable variances (Lucey, 1996). The flexible budget-

based performance evaluation provides a remedy for this phenomenon.

2.2 Empirical Literature Review

Countries with emerging economies suffer at times from the effects of political and

economic events which leave their businesses in a state of uncertainty. Within these

variables which are reflected in the price of the product or service and consequently

in the result, that is profit. To best administrate businesses in this scenario they must

36

be equipped with more efficient administrative controls which minimise the risk for

investment.

Magdy Abdel-Kader (University of Essex) and Robert Luther (University of the West

of England, Bristol) in their study on Management accounting practices in the UK

food and drinks industry in 2006 concluded that Cost Volume Profit analysis is most

frequently used in short-term decisions.

According to the study conducted by Syed Maqbool-ur-Rehman, (2011) entitled

“which management accounting techniques influence profitability in the

manufacturing sector of Pakistan?” it was found that Budgeting with a mean score of

4.42 (out of a maximum score value of 5) remained the most used and practiced

management accounting technique followed by Cost Volume Profit analysis. And An

Exploratory Study of Management Accounting Practices in Manufacturing

Companies in Barbados done by Philmore Alleyne in 2011 showed that the frequency

of use of CVP analysis is 67%.

These studies were most concerned with profitability influence and frequency of

usage, but they did not consider the limitations on applicability and relevancy of the

model in the rapid technological changing business environment (Researcher, 2013).

The Comparative Analysis of Management Accounting Practices in Australia and

Japan: An Empirical Investigation channelled in 1999 by H. Wijewardena and A. De

Zoysa, came out with results indicating that CVP analysis is the second important

technique in Japan and fifth in Australia. The ranking of importance indicates that the

37

Australian companies placed heavier emphasis on budgets, historical accounting

statements and standard costing while Japanese companies concentrated more heavily

on target costing, cost-volume-profit analysis and budgets.

Toomas Haldma and Kertu Lääts in their study on “Influencing contingencies on

management accounting practices in Estonian manufacturing companies” (2002)

asserted that Variable costing with the cost-volume-profit analysis offered a

convenient and more objective way to get an idea about the cost formation process in

manufacturing, to fix the price ranges and to realise an active pricing policy.

Manoj Anand, B.S. Sahay and Subhashish Saha 2005 in their empirical study on Cost

Management Practices in India found that The most widely used management tool is

cost-volume-profit analysis (77.3%) with reference to 65 percent adoption rate

finding of Joshi, 2001).

It was found that Break Even analysis could be applied in production planning and

control of manufacturing firms even where it is a multi-product firm. This is in line

with the studies of Ndaliman and Bala (2007) and the assertion of Nweze (1992).

These studies indicate that Break Even or CVP is applicable in many situations. The

other finding is that a relationship exists between the applications of break-even

analysis in production planning and control and the frequency with which due

dates/schedules are met by the firm.

In the study conducted in Nigeria by Ann I. Ogbo, Christopher Chukwudi Orga and

Adibe, T.N in 2012 with the title “Improving Production Planning and Control

38

through the Application of Breakeven Analysis in Manufacturing Firms in Nigeria”;

the results and findings suggest that multi- product firms can apply breakeven

analysis to great advantage. The single product firms can easily apply breakeven

analysis in production planning and control. Manufacturing firms in Enugu Urban

that apply breakeven analysis in production planning and control were more likely to

be profitable. Also such firms were more likely to meet due dates/schedules.

Manufacturing firms that apply breakeven analysis in production planning and control

were less likely to generate scraps. Most mass industries do not consciously engage in

breakeven analysis as a production planning and control tool.

Although it is nearly impossible to eliminate scrap and rework completely, they can

be reduced by optimizing the way product data are documented, reviewing

manufacturing processes and communicating manufacturing and engineering changes

throughout the supply chain. If priority is given to evaluating and improving

manufacturing processes, it becomes much easier to reduce the amount of scrap and

rework in the organization (Researcher, 2013).

It is clear to the company that understanding how costs behave is absolutely key to

making good decisions that affect market share analysis, annual budget preparation

and monitoring of results, sales volume and business mix decisions, pricing policies,

and cost management. According to the study done in Africa (Egypt) by Mohamed

(2006), as fixed costs in manufacturing organizations increase, and the economy

continues to shift more and more to service and e-commerce organizations, this fixed

cost emphasis has a significant effect on the decision-making process. When costs are

fixed, management‟s ability to influence costs with activity level decisions is limited.

39

With variable costs, management has more flexibility to change activity levels and

thereby increase or decrease total operating cost structures.

This trend of replacing variable costs with fixed costs has an important impact on the

cost structure of an organization that is captured in the concept of operating leverage

(Researcher, 2013). C-V-P analysis is used to make important planning decisions

concerning appropriate levels of production and spending.

Knowledge of break-even levels and profit-and-loss implications of different business

scenarios are relevant if managers are to make informed decisions which ensure

survival, optimize profits, and limit risk, giving rise to a feeling of “being more in

control” when making decisions (Graham et al., 1999).

An international hotel chain undertook a project to increase the effectiveness of

decision making of its properties in Europe, the Middle East, and Africa. In 1996,

company executives wanted to improve the financial planning and control decisions

of the hotel management teams. The Europe, Middle East, Africa division was

responsible at that time for approximately 240 hotels. Essentially, the executives

aimed to encourage a greater use of basic managerial accounting techniques such as

budgeting models and C-V-P analysis in order to improve the profitability of

individual hotels.

In 1995, the year before the new management focus on C-V-P analysis commenced,

the average operating profit margin in the Europe, Middle East and Africa division

was 35%. In 1998, the average operating profit margin was 39%. Although the hotel

40

executives do not believe that the new focus on C-V-P tools is the only reason for this

improvement, it has played a positive role in significantly adding to shareholder

value.

Source: Ian C. Graham and Peter J. Harris, “Development of a Profit Planning

Framework in an International Hotel Chain: A Case Study,” International Journal of

Contemporary Hospitality Management. 1999 (Issue 5), pp. 198–204.

2.3 Knowledge Gap

Numerous studies on CVP have been undertaken in developed countries, Asian and

some countries in Africa such as Egypt, Ghana, Nigeria and South Africa.

Furthermore, the studies previously done concentrated on Management Accounting

practices and Management Accounting techniques as decisions tools. However, there

is no published report of the study undertaken in Tanzania on the problem of CVP

and related aspects. In addition, the relevancy and assistance of CVP analysis as per

previous studies seem to be questionable. Hence this study will help in reducing the

gap especially in Tanzanian manufacturing companies.

2.4 Critical Review of Literature

2.4.1 Criticisms of Studies by Researchers

CVP analysis, like other managerial accounting techniques and models, uses

accounting profitability as the primary decision criterion for evaluating resource

allocation decision. It ignores the cost of capital and treats it as if it were zero.

However, the opportunity cost of the funds invested in the assets used to manufacture

a product is a cost the same as the cost of operating resources, such as direct material,

41

labour, and overhead. The failure of CVP analysis to incorporate the cost of capital

into a product's cost function can lead to underestimating a product's cost, while

overstating its profitability.

A deficiency of managerial accounting in general and CVP analysis in particular

involves its failure to include the cost of capital as an expense. Alfred Marshall, an

English economist in the 1800s, asserted that a firm does not earn a profit until its

operating income after taxes exceeds the cost of capital used to generate the operating

income. A firm's operating profit after taxes less the cost of capital used to generate

the profit measures its economic income. In the 1990s, Stewart (1991) proposed a

similar concept he referred to as economic value added (EVA) to evaluate a firm's

performance.

A firm's stock price will increase (decrease) when it earns a rate of return higher

(lower) than its cost of capital (Stewart, 1991). Therefore, when a firm's economic

income is positive, it creates economic value for the firm's stockholders. Conversely,

when the firm's economic income is negative, it destroys economic value.

Studies of the effect of economic income, or EVA, upon a firm's profitability and

stock price returns have been somewhat mixed. Hogan and Lewis (2005), in a study

of firms adopting economic income for management compensation, found that firms

that were well-suited for the use of economic income were more profitable relative to

firms that were equally suited for the use of economic income, but chose not to adopt

it.

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In a study of the association between economic income and stock price returns, Chen

and Dodd (1997) found that stock price returns were more highly associated with

economic income than accounting income. In a similar study, Biddle et al. (1997)

found stock price returns were more highly associated with accounting earnings than

with economic income. Additional empirical and theoretical studies of the

relationship between economic income and stock price returns are provided by Paulo

(2002), Chen and Dodd (2002), and Ferguson et al. (2005). Another major benefit of

CVP analysis is that it provides a detailed snapshot of company activity. This

includes everything from the costs needed to produce a product to the amount of the

product produced.

This helps managers determine, very specifically, what the future will hold if

variables are altered. For instance, transportation expenses and costs for materials can

change. These variable costs can affect the bottom line. CVP analysis allows the

manager to plug in variable costs to establish an idea of future performance, within a

range of possibilities. This, however, can be a disadvantage to managers who are not

detail-oriented and precise with the data they record. Projections based on cost

estimates, rather than precise numbers, can result in inaccurate projections.

2.4.2 Criticisms of CVP

Maximum condemnations of CVP arise from its basic underlying assumptions.

Economists (Machlup, 1952; Vickers, 1960) have been predominantly critical of

those assumptions. Their disapprovals take various forms, but they all arise from

CVP's departures from the normal supply and demand models in price theory

economics. In consequence, it assumes that variations in volume have no influence on

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elasticity of demand or on the efficiency of factors of production. Possibly the utmost

elementary dissimilarity among CVP analysis and price theory models is that CVP

ignores the curvilinear nature of total revenue and total cost schedules. Managerial

accountants recognize these economic critiques, but they rely on the other hand that

CVP analysis is a very advantageous initial analysis of strategic decisions (Horngren

et al., 1994).

Thus, managers characteristically must take into consideration an extensive diversity

of factors and decisions, for which they need to, employ a comprehensive variety of

tools and techniques. Many of such techniques are equally essential to effective

management.

In recent years, the business environment has witnessed more changes in competition

tools and management strategies. Consequently these are major changes that must be

implemented as to how organizations are managed and in how work is achieved. One

of the major tools which must be modified to be able to deal with such a new

environment is the budgeting system.

In contrary the CVP‟s ability to predict future costs, revenues and other factor, is

sometimes limited, hence what are probably minor variation from strict linearity are

likely to be significant compared to other forecasting errors. During a period of time,

the revenues and costs are estimated for different levels of output. Products may have

life cycles of many years. Mc Watters et al, (2001) discusses this problem in depth

and point out that, to accommodate a longer product life cycle, an assumption could

be made that each intermediate time period is identical in terms of revenues and costs.

44

If revenues and costs differ for intermediate time periods; some methods of trading

off profits from different periods of time must be used.

Supplementary criticisms of the basic nature of CVP analysis relates to its

connections to standard economic models, rather than its differences. Similar to

standard economic price theory models, basic CVP analysis ordinarily undertakes,

among other things, the following: single-stage, single-product manufacturing

processes; simple production functions with one causal variable; cost categories

limited to only variable or fixed; and data and production functions susceptible to

certainty forecasts. Additional, CVP analysis is typically restricted to one time period

in each case. The inadequacy of CVP appears to be discouraging, but CVP is flexible

enough to overcome them all, if necessary and desirable. Nonlinear and stochastic

CVP models comprising multistage, multi-product, multivariate, or multi-period

contexts are all promising, although a single model implementation all of those

postponements would look a thorough parting from the whole point of CVP analysis,

its basic straightforwardness. Universally, the strength and reputation of CVP analysis

undeniably reveals the willingness of its users to "live with" the deficiencies

discovered by censures of its elementary nature.

2.5 Conceptual Framework of the Study

CVP analysis explores the fundamental relationships between cost -volume-profit

variables. It is observed that changes in volume do influence cost and profit and,

while this process gets underway, a stage is reached when cost is equated with

revenue at a certain level of output or at a certain volume of sales. This is recognized

as break-even point. Practically, break-even point is a point which is incidental to

CVP analysis. Therefore, an attempt to define CVP analysis as break-even analysis

45

should be considered only restrictive. It must be admitted that break-even analysis

does become an integral part of CVP analysis but the two are not synonymous.

In the CVP analysis, sales price and sales volume appear as two independent

variables and they are often directly related to each other.

Profit is always a matter of primary concern to management. The volume of sale

never remains constant. It fluctuates up and down and income also goes up and down

with fluctuations in volume. Profit is actually the result of interplay of different factor

like cost, volume and selling price. Effectiveness of a manager depends on his

capabilities to make right predictions about future profits. This can be done when

correct relationship existing between cost, volume and profit is known. For this

reason, knowledge of relationship among cost, volume and profit is of immense help

to the management. This knowledge of cost-volume-profit relationship helps

management to find out right solution for such problems.

The quality of products and services and speed of production and delivery are the

factors that managers considers when using CVP analysis to determine product

prices, the mix of products, market strategy, appropriate sales commissions,

advertising budgets, production schedules, and a host of other important planning

decisions. Although CVP analysis is most useful for planning, it is also be used to

assist with controlling decisions and evaluating decisions. In fact, a lot of what is

done in management accounting involves some aspect of C-V-P analysis because of

the tremendous potential it has to help management increase the profitability and

effectiveness of an organization.

46

C-V-P analysis is a very important concept in management accounting and the key

factors involved in CVP analysis include (1) the revenues derived from the sales

prices charged for goods and services, (2) the fixed and variable costs, (3) the sales

volume, (4) the mix of products, (5) the speed and quality of production, and (6) the

resulting profits.

There have been many studies on CVP analysis for decision making as used in

organizations a long time ago. Nevertheless, these studies have not been telling us

how effective is the model in providing the managers with the information needed

particularly in the changing business environment. It is argued that, in order to

appropriately use this model, the stable environment is assumed in which cost and

volume will be stable. But this is not always true. Costs do change because of prices

and efficiency and volume changes because of change in demand or the conditions

within the organization that may affect production volume. Thus, in particular, this

study desires to comprehend how supportive is CVP analysis in decision making,

especially in contemporary manufacturing companies.

Although CVP analysis is often used to develop an understanding of the overall

operations of an organization or business segment, its accuracy decreases as the scope

of operations being analyzed increases. Once they analyze the reasons for differences

in profitability, emphasis can be placed on increasing revenues, reducing costs, or

both. They can also hold managers more accountable for performance, which should

motivate their work efforts toward the organization‟s goals.

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Strict CVP assumptions are violated in many business settings. The types of

uncertainties already discussed can lead to nonlinear behavior in revenues and costs.

In addition, it may be difficult to determine the point of operating activity where

operations move into a new relevant range.

Nevertheless, in many business settings CVP analysis provides useful information.

Accountants and managers use their knowledge of the organization‟s operations and

their judgment to evaluate whether the CVP assumptions are reasonable for their

setting. They can rely more on CVP results when the assumptions are less likely to be

violated. Also, the data used in CVP calculations must be updated continually to be

useful.

Figure 3: Conceptual Framework for Variables of the Study

Independent variables Intermediate variables Dependent variables

Source: Field work 2013

2.6 Relevance of Literature

There is hardly any research project which is totally unrelated with research that has

already taken place. Usually every individual research project only adds to the

accumulation of evidence on a particular issue. Unless the existing work, conclusions

-Selling price

-Sales volume

-Economy

-Business environment

-Demand and supply

-Rules and Regulations

- Laws

-Profit

-Costs

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and controversies are properly brought about, most research work would not appear

relevant, nor will it appear important in the whole framework. Thus, review of

literature is a very important aspect of any research both for planning the research

work as well as to show its relevance and significance.

The literature means the works the researcher consulted in order to understand and

investigate the research problem (Kombo and Tromp, 2006). It is therefore an

account of what has been published on a topic by recognized scholars and

researchers. It is a critical look at the existing researches that are significant to the

work that the researcher will be carrying out. It involves examining documents such

as books, magazines, journals and dissertations that have a bearing on the study being

conducted.

Literature review is the part of the paper where the researcher will be given the

opportunity to strengthen his/her paper by citing what other reliable authors have said

about the study. This is done to identify specific gaps in the previous studies related

to the problem. That is, the researcher identifies the questions that have not been

answered and problems that have not been solved. And by identifying gaps in the

prior studies, the researcher can justify the originality of the proposed dissertation

research. The originality can be an extension of research that has been published or a

modification of existing methodology or theory that can be used to perform another

study

There are many reasons why literature review is rendered as a significant part of any

research or dissertation paper. The literature review is an essential component of any

research undertaking due to the following;

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It improves and expands the theoretical basis of the study. Literature review

permits the researcher to study different theories linked to the acknowledged

topic. By reviewing these theories, a researcher gains intelligibility and better

understanding of the theoretical foundations related to contemporary research.

A literature review is an introductory exploration to support generates and

enhances research philosophies. It gives the researcher a comprehension into

what has previously been done in the carefully chosen field, pinpointing its

strength and weaknesses. This information guides the researcher in the

construction of a theory that aims at addressing the identified gaps.

The knowledge of the preceding works aids the scholar to cultivate a

substantial problem which will offer further understanding in the arena of

study. It also helps in restricting the research problem. This is through

interpreting what has previously been done and what would be worthwhile to

put an emphasis on in the current study. Review of literature is also important

to highlight difference in opinions, contradictory findings or evidence, and the

different explanations given for their conclusions and differences by different

authors. In some cases, an analysis of these factors can help one understand

various facets of a complex issue and at other times, such analysis can lead to

a new possibility that can be researched upon in the current project.

Extensive reading exposes the investigator to a range of methodologies of

dealing with the inquiry subject. This contributes to a well-designed approach.

The researcher can circumvent procedures specified in the literature to be

unsuccessful and implement new approaches. This will end in a substantial

study. That is, literature review is a foundation for realizing and providing

awareness into research strategies and methodologies that may be appropriate

50

to the research at hand. It also helps to avoid the mistakes, which already

done by another one. So researcher can improve the research design and

instrumentation, which was not successful at the last time (Cottrell &

McKenzie 2011).

Thus, due to its importance the Literature Review requires good organization.

Specifically, the researcher needs to develop efficient time management and note-

taking skills.it is also essential to be focused on assessing what is relevant to the

proposed research, and what is not relevant (irrelevant). A new research is depends on

the past knowledge, and not includes a part of knowledge. A well created literature

review establishes creditability of the researcher of the study, so he can get the entire

benefit of his work (O‟Leary 2004).

2.7 Conclusion

To help managers make better decisions, accountants should evaluate the quality of

the techniques they use, given the organizational setting and decisions to be made.

The quality of information generated from an analysis technique is higher if the

economic setting is consistent with the technique‟s underlying assumptions. Thus, the

outcome of this study can help decision makers determine when the technique; (CVP

analysis) is likely to be an appropriate tool and how much reliance to place on the

results. It can further be of assistance in making conclusions on the relevance and

efficiency of the technique under study.

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CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

Research methodology makes up one of the most fundamental parts in any research

project because it is a structure for data collection and analysis which facilitates

interpretation of such data in the practical section of the study. It is a way to

systematically solve the problem. It may be understood as a science of studying how

research is done scientifically (Kothari, 2004).

This section presents an overview of the methods used in the study. Areas covered

include the research design, population, sample and sampling techniques, data

collection and analysis.

3.1 Research Design

Research Design is the conceptual structure within which the research is conducted. It

is the arrangement of conditions for the collection and analysis of data in a manner

that aims to combine the relevance to the research purpose with economy in

procedures (Kothari, 2004).

The researcher adopted the survey type of research in which a sample from the target

population was used for the study. The study involved evaluation of the effectiveness

of Cost Volume Profit analysis in manufacturing companies. Consequently, the

research was designed to achieve the research objectives set out by the researcher.

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3.2 Population

According to Kombo and Tromp (2006), population is a group of individuals, objects

or items from which samples are taken for measurement. It refers to an entire group

of persons or elements that have at least one thing in common, for instance students at

university.

Tanzania Portland Cement Company Limited (TPCC) is currently the leader in the

cement industry in Tanzania. The company‟s objective is manufacturing, selling and

distribution of high quality construction cement in Tanzania and its cement

production covers approximately 45 per cent of the total cement market in Tanzania.

On the other hand, despite the fact that CVP is appropriate for many types of

industries, this type of analysis is typical for manufacturing firms. The targeted

population for study thus includes the following;

1. Chief Director and Directors of all departments

2. Coordinating Directors, Finance Officers and other staff of TPCC

3. Heads and staff of Management Accounting (cost accounting) department/division

3.3 Sampling and Sampling Techniques

Ideally one wants to study is the entire population. However, usually it is impossible

or unfeasible to do this and therefore one must settle for a sample. Sampling is the

process of selecting units, for example, people or organizations, from a population of

interest so that by studying the sample we may fairly generalize our results back to

the population from which they were chosen (William, 2006). It is the process of

selecting a group of subjects for a study in such a way that the individuals represent

53

the larger group from which they were selected. The key terms in sampling are

population and sampling frame. According to Black and Champion (1976), sample is

a portion of elements taken from a population, which is considered to be

representative of the population.

The questionnaire survey technique was used for primary data collection. For the

purpose of this study, random probability sampling and non-random sampling were

selected. Particularly, simple random sampling and purposive sampling were used

respectively. The basic characteristic of random sampling is that all members of the

population have an equal and independent chance of being included in the sample

(Kothari, 2004). An important benefit of simple random sampling is that it allows

researchers to use statistical methods to analyse sample results. It is also considered

as a fair way of selecting a sample from a given population since every member is

given equal opportunities of being selected. Due to the representativeness of a sample

obtained by simple random sampling, it is reasonable to make generalizations from

the results of the sample back to the population. As concerns, departmental directors,

coordinating directors, finance officers, management accounting and other staff were

included for simple random sampling.

A purposive sample is a non-representative subset of some larger population, and is

constructed to serve a very specific need or purpose. In this study, the Chief Director,

Head of management accounting division and production manager were included for

purposive sampling (non-random sampling). The respondents involved for random

sampling comprises departmental directors, coordinating directors, finance officers,

cost accounting division staff and other staff of TPCC.

54

3.3.1 Sample Size

The most important thing to take into consideration when thinking about the size of

sample is that, the sample should be optimum, that is, it should neither be extremely

large nor too small. This enhances efficiency, representativeness, reliability and

flexibility. As Roscoe (1975) affirms, “sample sizes larger than 30 and less than 500

are appropriate for most research”. Having in mind these limitations, the sample size

consisted of about 51 respondents, designed for the sample selected from the targeted

population.

Table 1: Profile of respondents

Description of respondent type Number to be sampled

Chief director 1

Departmental directors 4

Production manager 1

Coordinating directors 4

Finance officers 7

Head of management accounting division 1

Management accounting division staff 18

Other staff 15

Total 51

3.4 Data Collection Methods

Data collection is important in the study as it allows for dissemination of accurate

information and development of meaningful programmes.

There are two major sources of data used by researchers namely, primary and

secondary sources.

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3.4.1 Primary Data

Primary data are collected from original sources and not from already published

sources (Robson, 2003). This is through interview, questionnaire, diaries, observation

and focus group. Saunders et al, 2007 define primary data as data collected

specifically for the research project being undertaken.

3.4.2 Secondary Data

Secondary data are information neither collected directly by the user nor specifically

for the user, that is, data that are already available. They refer to the data which have

already collected by someone else. Saunders and Thornhill (2007) describes

secondary data as data used for a research project that were originally for some other

purpose. They include raw data and published summaries and may be collected from

diverse source of documents or electronically stored information.

3.4.3 Data collection Instruments

These are tools for data collection. The research tool provides the input into a study

and therefore the quality and validity of the output (the findings), are solely

dependent on it. For the purpose of this research, and in order to achieve the

objectives, relevant data were collected and both primary and secondary data were

used. The secondary data contributed toward the formation of background

information, needed by both the researcher in order to build constructively the project

and the reader to comprehend more thoroughly the survey outcome. Documentary

reviews of various studies and reports from Cement manufacturing industries, the

government, and other reports on the uses of Cost Volume Profit Analysis in decision

making were consulted.

56

Primary data were collected in two ways. Firstly, a questionnaire survey was

conducted by the researcher visiting the case study premises. Secondly, interviews

were also carried out with the organization members and some selected stakeholders

of the industry.

This study included both qualitative and quantitative data. Thus, the researcher

collected data by administering a questionnaire along with interviews to pave the way

for easy analysis of data. Focus group discussion was also conducted for top

management team and employees who are working in management accounting unit as

well as production manager.

3.4.3.1 Questionnaire

This is the primary vehicle of data gathering in sampling human population

(Baradyana and Ame, 2007).

The questionnaire used structured questions, consisting of approximately 27 questions

divided into five sections „A‟ „B‟, „C‟ „D‟ and „E‟, with an introductory part for

respondents‟ selected particulars. Section „A‟ consisted of six questions seeking to

answer the first research question. Section „B‟ consisted of six questions covering the

second research question whereas section „C‟ comprised questions to answer the third

research question. Sections „D‟ and E was made up of questions for answering

research questions four and five respectively. Most of the structured questions were

the close-ended type and respondents were asked to mark the appropriate box

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matching the correct answer. Other questions, however, required respondents to give

opinions.

In this category of data collection, the targeted group included heads and staff of

Management Accounting (cost accounting) department/division and other staff of

TPCC.

3.4.3.2 Interview

The interview method of collecting data involves presentation of oral-verbal stimuli

and reply in terms of oral-verbal responses (Kothari, 2004). It is a conversation in

which one person (the interviewer) elicits information from another person (the

subject or interviewee). A writer or reporter asks questions of one or more persons

from whom material is sought for a certain purpose.

For convenience and reliability of the data collected, the interview was channelled to

chief Chief Director, Directors of all departments, Coordinating Directors, Finance

Officers and production manager.

3.5 Data Analysis

Data analysis involves uncovering underlying structures, extracting important

variables, detecting any inconsistency and testing any underlying assumptions.

The responses to the structured close-ended questions were rated in percentages.

The percentage of respondents for each alternative was given and analyzed. The data

collected were analyzed with the help of the computer software known as Statistical

Package for Service Solution (SPSS).

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3.6 Reliability and Validity of the Study

3.6.1 Reliability

Research findings have to be credible, and credibility has something to do with the

extent to which research results are reliable and valid. Reliability refers to how

consistent a measuring device is. Joppe (2000) defines reliability as the extent to

which results are consistent over time and an accurate representation of the total

population under study. A measurement is said to be reliable or consistent if the

measurement can produce similar results if used again in similar circumstances. Thus,

reliability is concerned with whether the measure used in research will yield the same

results in different occasions or if it can provide similar observations if done by

different researchers on different occasions (Saunders et al, 2000).

Although the term „Reliability‟ is a concept used for testing or evaluating quantitative

research, the idea is most often used in all kinds of research. According to Stenbacka,

(2001) the concept of reliability is even misleading in qualitative research. If a

qualitative study is discussed with reliability as a criterion, the consequence is rather

that the study is no good. On the other hand, Patton (2002) states that validity and

reliability are two factors which any qualitative researcher should be concerned about

while designing a study, analysing results and judging the quality of the study.

3.6.2 Validity

The concept of validity is described by a wide range of terms in qualitative studies.

This concept is not a single, fixed or universal concept, but “rather a contingent

construct, inescapably grounded in the processes and intentions of particular research

methodologies and projects” (Winter, 2000). Although some qualitative researchers

59

have argued that the term validity is not applicable to qualitative research, but at the

same time, they have realized the need for some kind of qualifying check or measure

for their research. For example, Creswell & Miller (2000) suggest that the validity is

affected by the researcher‟s perception of validity in the study and his/her choice of

paradigm assumption. As a result, many researchers have developed their own

concepts of validity and have often generated or adopted what they consider to be

more appropriate terms, such as, quality, rigor and trustworthiness (Stenbacka, 2001).

3.6.3 Achieving Validity and Reliability

It is important to understand some of the problems concerning reliability which might

arise and because issues of validity and reliability are an important part of any study

in the social sciences, it is important to identify some ways of dealing with results.

This is the case study research; therefore the researchers went to great lengths to

ensure that interpretations of the data are both reliable and valid.

It is ideal to reliably measure, every time, exactly those things which we intended to

measure. However, researcher was able to go into great lengths and make every

attempt to ensure accuracy in the study, but still deal with the inherent difficulties of

measuring particular behaviors of variables under study.

This study includes both qualitative and quantitative data. Therefore, a triangulation

of techniques was used in collecting primary data. Triangulation includes multiple

methods of data collection and data analysis, but does not suggest a fix method for all

the researches.

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CHAPTER FOUR

STUDY FINDINGS, ANALYSIS AND DISCUSSION

4.0 Introduction

This chapter presents findings of the study as the result of analysis of data collected

from the research field. There are three main sources of data from which the findings

are generated; oral interview, questionnaire and review of TPCC annual reports

(financial statements). Oral interviews and questionnaires were used to source for

primary data different levels of management officials of TPCC. Seventeen

respondents were interviewed and the questionnaires were also given to them and

further thirty four respondents were given questionnaires. Furthermore, some libraries

were used and a lot of textbooks, journals, financial statement and newspapers were

consulted during the collection of secondary data. All the questionnaire were returned

and analysed which served as our basis of discussion and recommendation.

The general objective of this study was to determine if CVP can assist management in

formulating pricing policies by projecting the effect of different price structures on

cost and profit and to highlight the usefulness of CVP analysis in manufacturing

companies in Tanzania. The specific objectives were to identify the factors affecting

CVP analysis, to determine the challenges facing manufacturing companies when

using CVP analysis for decision making, to determine the relevance of CVP in

modern manufacturing firm‟s decision making, to find out if CVP analysis is helpful

in setting up flexible budget which indicates cost at various levels of activities and to

find out if CVP analysis is useful in evaluating performance for the purpose of

control.

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4.1 Features of Respondents

This section is dedicated to the offer the particulars of respondents predominantly sex,

level of education and working experience. Fifty one (51) respondents were involved

in the study and their personal details are given below.

4.1.1 Gender Parity

TPCC had 356 employees including 318 (89%) males and 38 (11%) females from

which a sample of 51 was drawn. From the sample; 45 (88%) were men whereas

women comprises 6 (12%). The company had more men compared to women but

there was no reason other than professional qualification on such imbalance. It was

stated that gender has nothing to do with the company‟s overall performance.

4.1.2 Level of Education

Level of education in this regard encompasses competences of the management and

other staff of the company. The investigation revealed that TPCC has qualified staff

in its different departments. Its team comprises people who are skilled,

knowledgeable, committed and having positive attitude towards their work. The great

party of employees hold degree and/or post graduate degrees. This conform the

performance of the company.

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Table 2: Level of Education

S/N Level of education Frequency Percentage

1 Degree/postgraduate 37 73

2 Diploma 9 18

3 Secondary school 5 9

4 Primary school 0 0

Total 51 100

Source: Field work 2013

Note: respondents were required to indicate their highest education level only

4.1.3 Work Experience

As far as the study is concerned, work is the time an employee has worked in the

company under study. The outcome confirms that the company has good retaining

ratio of its employees. More employees have been serving the company for more than

5 years. There are few employees worked for less than 3 years. This indicates that

experienced and skilled labourers are retained to enhance improvement in company‟s

performance.

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Table 3: Work experience

S/N Experience Frequency Percentage

1 Less than 3 years 9 17

2 3-5 years 12 24

3 More than 5 years 30 59

Total 51 100

Source: Field survey 2013

4.2 Historical Background of the Company

Tanzania Portland Cement Company Limited (TPCC) was established in 1959

producing its first bag of cement in 1962, in association with Tanzania Development

Corporation and Cementia AG of Switzerland. The major cement-producing facilities

at Wazo Hill in Dar es Salaam went online in 1966. In 1973 the company was

nationalized with the government of Tanzania owning 100% of shares. In 1998 the

company was reprivatized by the government to Scancem of Norway and Swedfund.

By 2005 Twiga was a part of Heidelberg Cement Africa, of which Scancem is

subsidiary. The company‟s objective is manufacturing, selling and distribution of

high quality construction cement in Tanzania. Today the company remains the market

leader in the cement industry in Tanzania.

The company manufactures two brands of cement, strictly conforming to the latest

standards issued by Tanzania Bureau of Standards; Twiga Ordinary and Twiga Extra.

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TPCC is the leading cement producer in Tanzania and operates a cement plant near

the coastal city of Dar es Salaam, the biggest market in Tanzania. TPCC‟s current

cement production covers approximately 45 per cent of the total cement market in

Tanzania.

4.3 Objective One: General Understanding of Cost Volume Profit Analysis

(Factors Affecting CVP Analysis)

The first research question was derived from this objective. The researcher intended

to investigate if the respondents have knowledge on the model (CVP analysis). As a

result the question was further broken into six small questions so as to comprehend

the concept. Respondents were urged to choose the correct answer and below are the

results from respondents;

4.3.1 CVP Analysis Awareness

Most of respondents (48/51), that is, 94% of the respondents were conscious of the

model whereas three out of fifty one respondents were completely ignorant about the

technique. Additionally, it was surprising that among the three who were absolutely

uninformed of the method, one was the member of the top management.

4.3.2 Linearity of Costs and Revenue

Respondents were asked to tell the researcher, in accordance with their practical

experience, if the statement stated by academicians that costs and revenue have linear

relationships is true. Six (6) respondents agreed while forty five (45) were different.

The reply of respondents shows that costs and revenues are not linear. In oral

interview some were giving more explanations on that but there was no point which

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can give an opinion that cost and revenue are linear. In depth probing demonstrated

that who the „yes‟ replies were based on theoretical beliefs. This is similar to Ndalima

and Bala (2007), in a study on block industry in Nigeria, discovered that “sales

revenue and total cost were not linear, two or more breakeven points were found to

exist, some costs fall under both fixed and variable portions and that beyond certain

optimal production levels sales revenue decreases and total cost also increases.

This contradicts with the declaration given by other researchers and academicians

such as Drury, (2004) who states that within the relevant range, it is generally

assumed that costs and revenue fuctions are approximately linear but outside the

relevant range linearity is unlikely to appear. This indicated that total cost function is

linear for a certain period. Although in reality the Variable costs discussed in this case

(TPCC) tends to be curvilinear in behaviour, for the sake of the analysis they are

relaxed to be linear functions. This however does not decrease the usefulness of the

analysis as it give a solid ground and a good overview for managers to start further

investigation of problems and to be able to take right decisions. Therefore it is urged

that it may be well that management is of the opinion that over the likely output range

linearity is a reasonable assumption to make.

4.3.3 Drivers of Costs

In traditional costing the cost driver to allocate indirect cost to cost objects was

volume of output. With the change in business structures, technology and thereby cost

structures it was found that the volume of output was not the only cost driver. Some

examples of indirect costs and their drivers are: indirect costs for maintenance, with

the possible driver of this cost being the number of machine hours; or, the indirect

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cost of handling raw-material cost, which may be driven by the number of orders

received; or, inspection costs that are driven by the number of inspections or the hours

of inspection or production runs (Drury 2004).

Examination and analysis of company cost activities are important in classifying

overhead costs into those based on organizational activities or those based on

operational activities. Organizational activities are company related in the long-term,

while operational activities are product related. Operational activities can be further

classified into three levels: unit, batch and product (Lucey, 1996). Overhead cost

allocation and apportionment can then be worked out systematically.

Our study shows that cost drivers are many and they might be situational in some

cases depending on the prevailing business condition. A certain cost may be

influenced by a certain driver in a certain period and another driver in another period.

All of our respondents (51) that is 100% disagreed on the notion that volume is the

only factor which influences costs. To conclude, a clear conceptual view is needed for

correct classification and measurement of overhead costs.

4.3.4 Separation of Costs into Fixed and Variable Categories

Respondents were asked in this to indicate how their company classifies specific cost

items; but the question appeared not to be fair to ask anybody. The result indicates

that there are too many variables that influence the classification, and the prescription

of fixed rules to follow when classifying costs will be of no value.

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The following guidelines may however be used in the classification and management

of costs;

1. Since fixed costs are responsible for increasing the operating risk of a

business, companies should manage the operating risk by determining, on an

on-going basis, the fixed costs as a percentage of total costs.

2. Since the cost items of direct and indirect manufacturing labour are mostly

classified as fixed costs, efforts must be made to shift direct costs to variable

costs.

The three-category classification (fixed, variable and semi-variable) used in this study

is insufficient to explain the behaviour of specific cost items. This classification must

be based on the amount of time or money it takes to get rid of the costs. Companies

should analyse their fixed costs in order to distinguish between committed and

discretionary costs. It is important to note that the accuracy of the cost-volume-profit

analysis is a function of the accurate classification of total costs into fixed and

variable components. If the classification is done poorly, the results will be

misleading.

It was also found separation of mixed costs is difficult and these can be put in any

category as the management thinks fit. This finding confirms the conclusion by

Hough (1993) that some managers regard costs to be variable when output climbs and

fixed when output falls. Also, costs are classified differently in order to report

“different costs for different purposes”. Bear and Mills (1994) explain this matter in

their research, which shows that all costs are classified as variable for activity-based

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costing purposes and all costs, except direct materials, are classified as fixed for

throughput costing purposes.

However, a reliable observation was obtained as 96% of respondents (49) confirmed

that TPCC separates its costs into fixed and variable components and only 2%

disagreed.

4.3.5 Factors Affecting CVP Analysis

The question on factors affecting CVP was unexpectedly not understood to some of

respondents. So the researcher was required to put some more explanation on it

especially to respondents who were involved in interview. Some respondents were

even unable to give their replies on the question.

The result shows that volume, unit selling price, variable cost per unit, fixed costs and

sales mix in combination are the factors affecting the model by 64%. During the

course of interview it was also realized that there are so many factors affecting CVP

in practise such as demand and supply, government regulations, changes in the value

of currency and learning curve.

Table 4: Factors Influencing CVP

S/N Response Frequency Percentage

1 Volume 2 4

2 Unit selling price 6 13

3 Variable cost per unit 8 17

4 Total fixed cost 1 2

5 Sales mix 0 0

6 All the above 31 64

Total 48 100

Source: Survey data 2013

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Note 1: This is based on restricted response (every respondent was asked to give only

one response).

Note 2: Three (3) respondents did not give any response

4.3.6 Factors affecting CVP the Most

Apart from knowing factors affecting the method the researcher was interested to

further know which factor(s) plays a great role in persuading the model. Variable cost

gives the impression to be the most affecting factor of CVP analysis with the highest

score of 45% followed by unit selling price which occupies 36%. Total fixed cost

ranked third (11%) while sales mix seems to be the least. Volume which Horngren et

al, (1997) assumes to be the only factor influencing costs ranked fourth by only 4%.

It is urged that further investigations have to be done on the most affecting factor so

as to put more reliance on the model for decision making. This is because of low

percentage of response (less than 50%) on the issue.

Table 5: Factor Affecting CVP The Most

S/N Response Frequency Percentage

1 Volume 2 4

2 Unit selling price 17 36

3 Variable cost per unit 21 45

4 Total fixed cost 5 11

5 Sales mix 0 0

6 All the above 2 4

Total 51 100

Source: Field work 2013

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Note: This is based on restricted response (every respondent was asked to give only

one response).

4.4 Second Objective: CVP Analysis And Related Challenges

The challenges facing management is numerous particularly during the period of

economic depression characterized by liquidation of many companies, low capacity

utilization, shortage of rapid change in foreign exchange currencies and the advanced

state of competition. Management is faced with the problem of how to make use of

the available scare resources in order to achieve the objective of profit maximization

(Researcher, 2013).

4.4.1 The Use of CVP Analysis in Planning and Control

The company lacks understanding on the importance of cost volume profit analysis

over other forms of techniques and as the result TPCC seems to not to consider CVP

analysis as a strong tool in their decision making. There is no practical application of

cost volume profit analysis in the organization. Eighty two percent (82%) of

respondents said that CVP analysis is not the technique used for decision making in

the company. From oral interview, budgeting, return on investment (ROI) and net

present value (NPV) appeared to be the methods preferred.

4.4.2 Planning and Control Problems

Planning is an inevitable part of all rational human activity. Because of its

importance to organizations, the planning processes have to be sophisticated and

structured in order to improve their efficiency. Lucey, (1996), defines planning as the

establishment of objectives, policies, strategies, tactics and actions required to

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achieve these objectives. Control is concerned with the efficient use of resources to

achieve a previously determined objectives contained in a plan.

Planning precedes control, and planning without consideration of the type, frequency

and method of control will largely be a waste of time (Researcher, 2013).

The question required respondents to give brief explanations on the problems the

company faces in planning and control of the organization‟s operations.

The analysis specifies that, control is applied at different levels within the company.

The analysis indicates that TPCC has two categories, internal and external focused

control. Externally, the company‟s emphasis is on how a firm, given its strengths and

weakness, and limitations can compete with other firms in the same industry. Internal

control aims at influencing employee behaviours in desirable ways in order to

increase the probability that organizational goals will be achieved.

The main problems related to control are the fruit or products of mistakes done or

violence of planning procedures. Sometimes, the plan set becomes difficult to realize.

This stems from improper planning which comprises imposing control measures

which motivate some employees to engage in behaviour that is not organizationally

desirable. In other cases the company‟s objectives seems to be unspecified which

consequently, causes difficulties in linking the plan/ budget requirements to chart of

account.

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The evidence suggests that data manipulation is common with result control. There

are some employees who attempt to distort the data in order to improve the

performance measure. Another problem is that, if controls are applied excessively

rigorously results in job related tensions, conflict and deterioration in relationship

with managers. Furthermore, there are some factors which cannot be controlled such

as economic and competitive factors, acts of nature and interdependencies.

4.4.3 CVP Analysis in Long-Term Planning

CVP analysis becomes more complex and questionable if its application is extended

to a longer term time horizon (Drury, 2004). In the longer term other factors besides

volume are likely to be important. Break even analysis completely ignores the capital

employed in business hence it has limited application in the long range planning. It

ignores marketing aspects and effects of government policies and other authorities‟

regulations which are necessary in decision making (Researcher, 2013).

Regarding the applicability of CVP for strategic planning the study wanted to know if

CVP analysis is used for long-term planning in the company. The result indicates that

CVP is completely not used for long-term planning as 100%, 51 respondents were not

in favour of the issue.

4.5 Third Objective: Applicability of Breakeven Analysis in Modern

Manufacturing Firms

4.5.1 Capital or Labour Intensive Business

The relationship between a company‟s variable and fixed costs is reflected in its

operating leverage. Typically, highly labour-intensive organizations have high

variable cost and low fixed cost; these organizations have low operating leverage

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(MacArthur, J.B. and Stranahan, H.A., 1998). Conversely, organizations that are

highly capital intensive or automated have cost structures that include low variable

and high fixed cost, providing high operating leverage.

Twenty eight (28) respondents which is equivalent to 54% told the researcher that the

company is capital intensive while 18% stating that TPCC is labour intensive.

Fourteen (14) respondents, 28% were impartial and said the firm is capital and labour

at equal mixture.

Table 6: Capital or Labour Intensive Business

S/N Response Frequency Percentage

1 Labour intensive 9 18

2 Capital intensive 28 54

3 Capital and labour at equal mixture 14 28

Total 51 100

Source: Survey data 2013

Note: This is based on restricted response (every respondent was asked to give only

one response).

Furthermore, the survey especially in oral interview discovered that, no significant

positive relationship was found to exist between the fixed cost component of the

company and their degree of technological development. The fact that the company

reported that direct and indirect manufacturing labour tend to be more fixed means

that it is very difficult for manufacturing company to adjust their workforce according

to production needs. This contradicts the theory that classifies labour as a variable

cost (Garrison and Noreen 2000; Fritzsch 1998).

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4.5.2 Price Determinants and CVP and Competition

Cost information is only one of many variables that must be considered in the pricing

decisions. In some firms prices are set by overall market demand and supply forces

and the firm has little or no influence over the selling prices if its products or services

(Dwivedi, 2008). Other variables include competitor‟s price and number of

substitutes.

According to “ THE CITIZEN” newspaper dated 8 September 2011 Cement

imported from India, China and Pakistan into the East African Community (EAC)

member states is hurting local manufacturers since it is sold at a cheap price than the

locally manufactured products. For the company's cement to be able to compete with

the imported brands, TPCC slashed its products' prices by 11 per cent starting June

2010. This move resulted in a 20 per cent rise in turnover as a result of higher sales

volumes compared to 2009.

Table 14; below shows that the price for TPCC cement is determined by the

combination production costs, demand and supply and competitors‟ price by 78%.

Demand and supply takes the second rank with 14% while competitors‟ price seems

to be the least to be considered. Production cost costs follows demand and supply

with 6%. Thus we can conclude that demand and supply plays a great role in pricing

policy of TPCC.

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Table 7: Price Determinants and CVP and Competition

S/N Response Frequency Percentage

1 Production costs 3 6

2 Demand and supply 7 14

3 Competitors‟ price 1 2

4 Combination of a, b and c 40 78

Total 51 100

Source: Survey data 2013

Note: This is based on restricted response (every respondent was asked to give only

one response).

4.5.3 CVP and Risks

Today's economy is faced with challenges such as constantly increasing competition

on worlds markets, strengthening less developed countries and their economies, and

stronger technological innovations. Although certain changes that occur are the

stimulus to economic activity, also, some movements on the market may become a

threat (Researcher, 2013). In fact, the current economic crisis as recession has

covered all countries of the world, and the consequences that result are very critical.

Lowering production and other economic activities are caused by a number of other

events that adversely affect the economy, for example, reduced production, growth of

fixed costs per unit, reducing the number of employees and increase of

unemployment, decrease in exports and weakening domestic currency exchange rate.

In addition to the expected values of profit for the company, management is always

interested in the degree of uncertainty of the planned profit (Drury, 2004). Traditional

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CVP model suffers from the limitation of not including any adjustment for risk and

uncertainty.

The respondents were asked to state whether CVP model is capable of measuring the

risks and uncertainties the business faces in its day to day operations. The analysis

shows that 77% disagreed while only 23% of respondents agreed. These results

indicate that CVP analysis is unable to predict such risks.

4.6 Objective Four: Budgeting and CVP Analysis

4.6.1 Cost Behaviour in Budgeting

The knowledge of how costs will vary with different levels of activity is essential for

decision making (Drury, 2004).The study revealed that TPCC considers the behaviour

of costs when preparing their budget. However, there are some difficulties in

identifying the variable or fixed portion of cost in mixed costs. The management is of

the concern that it would better for the company to efficiently separate these costs but

it is still struggling to use the available knowledge to identify the best or appropriate

method to separate such costs.

Most academicians (Drury 2004 Lucey 1996 and Horngren et al, 2000) urge that

flexible budgets change in accordance with levels of activities in a firm, hence

making them simple to prepare. Most businesses should be using both static and

flexible budgets during the course of their business operations, with the only notable

exception being during business cycles when the company manages to strictly adhere

to the original static budget, in which case the actual statistics contained within the

static and flexible budgets would be equal.

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According to our suervey TPCC is considerate to cost behaviour in the when comes

to the issue of budgeting. Forty two (42), (96%), respondents agreed that cost

behaviour is among the important issues to consider in budgeting while only 4% of

respondents were opposing.

4.6.2 Monitoring With Budget

Monitoring is very crucial in any business operation and it serves as a vehicle for

review and correction of any discrepancies related to business activities. TPCC uses

to monitor its operations regularly using flexible budget. Budgeting seems to be the

best tool for coordinating activities across the business and cash flows planning. This

conforms to findings by Chenhall and Langfield- Smith, (1998) which found that the

application of budgeting systems is the vehicle to assist resources allocation in the

short-term and capital budgeting and strategic planning for the long term.

72%, that is 37 respondents said the company do use flexible and fixed budget, while

20% and 8% stood for flexible and fixed budget respectively. This is in line with the

suggestion made by Kaplan et al, 1998.

Table 8: Monitoring with budget

S/N Response Frequency Percentage

1 Flexible budget 10 20

2 Static budget 4 8

3 Both, static and flexible budget 37 72

Total 51 100

Source: Survey data 2013

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Note: This is based on restricted response (every respondent was asked to give only

one response).

4.6.3 Budgeting and the Company’s Business Pattern

Using cost volume profit analysis, mangers can develop trends that explain behavior

patterns of products and services (Emmanuel et al., 1990). Knowledge of these trends

is useful where the typical nature of the business is one that is unpredictable in terms

of sales levels and the demand for the products and services. Cost volume profit

analysis is therefore of important reliance in such business.

A brief outline is necessary in understanding the Cost Volume Profit analysis (or

CVP) and creating a decision model. In a very general outlook, the CVP looks at how

fixed, variable, and mixed costs change with changes in sales volume. The main goal

is to determine what factors control costs and see how management can use this

information to improve planning and control activity

In the course of survey the researcher came out with the conclusions that static and

flexible budgets are two separate yet interconnected parts of a solid business

accounting regimen. Static budgets are a good way to keep production costs on track,

and encourage the staff in charge of purchasing to make the greatest possible effort to

obtain the required goods at the lowest possible price. A flexible budget can

sometimes account for an entire company budget; however, it is best used as part of a

larger overall budget in a subsection role, such as a variable expense account.

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4.7 Objective Five: Performance Evaluation With CVP Analysis

In developing performance measures that are appropriate to the needs of their

organizations, managers must consider not only the basic questions of what to

measure and how to measure, but a variety of other issues as well (Scarlett, 2005). A

performance report should contain information only about the costs, revenues, and

resources that a manager can control. Performance reports allow comparisons

between actual performance and budget expectations

4.7.1 Performance Valuation

The observation shows that financial performance evaluation measures are relatively

highly adopted than non-financial measures. According to oral interview, budget

variance analysis seems to be the most widely used model for performance evaluation

of the company. The comparison of other methods (ROI, NPV and Payback period)

showed that ROI which is at 64% percentage of adoption, and Net Present Value

(NPV) which is based on controlling profit at 23% adoption rate and payback period

at 13%.

Table 9: Performance Valuation Methods

S/N Response Frequency Percentage

1 ROI 32 64

2 NPV 12 23

3 Payback period 7 13

Total 51 100

Source: Field work 2013

Note: This is based on restricted response (every respondent was asked to give only

one response).

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Accordingly, it seems that all financial measures for performance evaluation are

either highly or moderately adopted, which indicates that TPCC place greater

emphasis on periodic profitability, which in turns reduces research and development

costs.

4.7.4 Bases for Performance Evaluation

Variable costing is a method of preparing profit center performance reports that

classifies a manager‟s controllable costs as variable or fixed (Scarlett, 2005).

Performance reports may also use flexible budgeting and variable costing to measure

and evaluate non-financial information. Conversely, flexible budgeting is a more

sophisticated method, according to AccountingCoach.com, because the new business

owner can make changes to the budget in the middle of the reporting period. The best

reason to use a static budget is the variance analysis (Drury, 2004)

Kaplan et al, 1998, assets that most businesses should be using both static and flexible

budgets during the course of their business operations, with the only notable

exception being during business cycles when the company manages to strictly adhere

to the original static budget, in which case the actual statistics contained within the

static and flexible budgets would be equal.

Table 10: Bases for Performance Evaluation

S/N Response Frequency Percentage

1 Flexible budget 11 21

2 Static budget 4 8

3 Both, static and flexible budget 36 71

Total 51 100

Source: Field data 2013

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Note: This is based on restricted response (every respondent was asked to give only

one response).

The outcome of our investigation discovered that TPCC uses both fixed and flexible

budget as the base for performance evaluation of its operations. 71%, that is 36

respondents said the company do use flexible and fixed budget, while 21% and 4%

stood for flexible and fixed budget respectively. This is also in line with the

suggestion above by Kaplan et al, 1998.

4.7.5 Effectiveness and Efficiency of CVP

It was difficult for researcher to measure the effectiveness and efficiency of CVP as

the company has not adopted the method as a tool for planning and control of its

operations. The response from respondents on this indicates that there was no way in

which CVP could have helped the organization to operate effectively and at an

efficient way to management of its activities. For this case, the strict assumptions

may be the cause hence the application of the model becomes difficult to the extent

that it is not consired to yield substantial positive outcomes when used as a decision

tool.

However, according to Dwived, (2008), CVP model helps in evaluating the effects of

cost on changes in volume for the purpose of reviewing profits achieved and costs

incurred. For example, a company may want to purchase new equipment to increase

its production level. The new machine may increase fixed costs. In this case, to find

out the figure by which to decrease the variable cost in order to maintain the same

profit level, the company uses CVP analysis.

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4.8 Summary of data analysis

The analysis of our data and discussion indicates that, the researcher‟s objectives

were achieved by 100%, but some respondents could not understand the issues related

to CVP. Although most of the variables of model are considered, CVP seems not to

be currently or prospectively considered to be of assistance. The deficiencies are

recognized and the researcher noted them and not only that but also recommended

further studies to be conducted on the problem.

TPCC is performing well in the country but it cannot be said as it is working at most

efficiency. It is well known that all manufacturing companies face more or less the

same challenges. These includes poor technology, unreliable market for the final

processed goods, high cost of power, unreliability of power and underdeveloped

infrastructure, unreliable availability of raw materials and small number of trained

manpower. Thus, the techniques for decision making are of the great importance to

enhance organizational competitiveness through organizational reengineering, cost

reduction, process improvement, and quality management, amongst other relevant

applications. Also, a number of organisational innovations have to be pursued to

enhance organisational competitiveness.

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CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter brings about summary, conclusions and recommendations on the

findings of the study. These are grounded from the research objectives and questions

of the problem.

5.1 Summary

This research work focused on the Analysis of performance of Cost Volume Profit

(CVP) analysis in manufacturing companies in Tanzania. The key variables in the

study are selling price of the products, volume of sales and cost of production The

general objective of this study to determine if CVP can assist management in

formulating pricing policies by projecting the effect of different price structures on

cost and profit and to highlight the usefulness of CVP analysis in manufacturing

companies in Tanzania.

Objective one: General Understanding of Cost Volume Profit Analysis

(Factors Affecting CVP Analysis)

C-V-P analysis provides management with a general overview of the company's

financial operations. However, it is important to note that the C-V-P analysis will

need updating as sales prices, sales mix and costs change to reflect the new

relationship between these variables. The results of the study indicates that CVP

analysis is indirectly used and at a very low pace. Executives and managerial

departments are using what they know about costs to create business strategies. By

gathering information on market demand and combining it with a marketing strategy

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that focuses on higher margin products, the company is able to continue with

operations, increase profits and survive. TPCC Company is the highest performing

company in the industry of cement and the company separates its total costs in their

category of fixed and variable costs.

Objective two: CVP Analysis and Related Challenges

In the course of my study, it was realized that lot of problems or challenges are being

encountered by the company like problem of how to make use of the available scarce

resources in order to achieve the objective of profit maximization, there is no absolute

practical application of cost volume profit analysis in the company.

Objective three: Applicability of Breakeven Analysis in Modern Manufacturing

Firms

The sales of the company are consistently growing by considering any cost factors but

the variable cost of the company is not proportionately changing. The fluctuations in

the fixed costs are absolutely reasonable towards the company except in some cases.

The company is suffering from contribution losses because of its increased fixed costs

and declining of contribution. In the last five years 2007 to 2011, the highest

contribution for the company was in 2010 which is because of the variable cost

amount is comparatively less to its sales. The profit of the company is declining

because the fixed costs are increasing and contribution is decreasing. Thus the

relevance of the model (CVP) is questionable.

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Objective four: Budgeting and CVP Analysis

TPCC makes fixed and flexible budgets. Flexible budget indicates the costs and the

expected revenues at various stages of production. They are also able to understand

the break-even concept, and hence they can make strategic budgets and avoid losses

where necessary. However, although CVP is helpful in achieving this, TPCC does not

consider it to be the powerful tool for their decisions.

Objective five: Performance Evaluation with CVP Analysis

Flexible budgets work well as a performance evaluation tool in conjunction with a

static budget and are basically a comprehensive accounting of the static budget's cost

variance. Because the flexible budget changes based upon volume, it provides a

greater level of control. Budget variance analysis and ROI are the models considered

to be more helpful in performance evaluation of TPCC.

5.2 Conclusion

Equally doubtful is the assumption that the variable cost curve is linear so that

variable costs change in direct proportion to changes in volume. As demand for input

factors increase so will their price, with the effect that the variable cost curve is likely

to increase proportionately faster as volume of output expands. To overcome the

limitations associated with the model, and to retain the usefulness of CVP analysis it

is necessary to limit the volume range to be examined so that the behaviour of both

fixed and variable costs may be more accurately determined. The basic assumption

that the cost-volume relationship is a linear relationship is realistic only over narrow

ranges of output which is called the relevant range.

86

CVP analysis, though it is a very useful tool for decision making, is based upon

certain assumptions which can rarely be completely realized in practice. Hence the

fragility of these assumptions places limits on the reliability of CVP analysis as a tool

in decision making. Nevertheless, in many business settings CVP analysis provides

useful information. Accountants and managers should use their knowledge of the

organization‟s operations and their judgment to evaluate whether the CVP

assumptions are reasonable for their setting. They can rely more on CVP results when

the assumptions are less likely to be violated. Also, the data used in CVP calculations

must be updated continually to be useful.

Increased global competition has forced firms to become more cost competitive.

Consequently, business managers have adopted various decision making models and

methods. Based on the findings, it can be concluded that the companies must monitor

and take into account the requirements arising from the contemporary risky business

conditions. The new conditions require the implementation of new models and

methods of managing enterprises, and improving existing ones. In presented

enterprise, CVP analysis seemed to be not well known and hence not applied for

managers to find out and decide what to do to improve business and get planned

values of certain indicators. According to these methods, decision – making process is

much safer and possible and the results can be achieved at a higher level. The study

demonstrated the functions of CVP analysis particularly in manufacturing business as

well as its limitations.

Despite its limitations, the real usefulness of CVP is that it enriches the understanding

of the relationship between costs, volume and prices as factors affecting profit,

enabling management to make assumptions which will assist the decision-making

87

process in the short-run planning period. TPCC uses both flexible and fixed budgets

in its operations. A flexible budget is a statement of projected revenue and

expenditure based on various levels of production. The flexible budget responds to

changes in activity and may provide a better tool for performance evaluation. It is

more sophisticated and useful than a static budget. A flexible budget is compared to a

company‟s static budget to find variances between the levels of expected and actual

spending. Above all, the break-even analysis should be viewed as a guide to decision

making, not a substitute for judgement and common sense.

5.3 Recommendations

5.3.1 Recommendations to Policy Makers

The economic benefits for stakeholders and the government from the unit may

encourage policy makers to focus efforts on areas which are potential in

decision making. Cost management refers to the activities of managers in

short-run and long-run planning and control of costs. Therefore, beside the

traditional techniques new methods appear. Global market, international

business processes, customers‟ growing needs for high quality with low price

focus managers‟ attention to cost management. At the inception of CVP

analysis concept, manufacturing organizations were labour intensive. Now,

competition and complexity of the structure of production process of goods

have become increased. So, manufacturing organizations have to think about

production at lowest possible cost. On these circumstances, traditional

management accounting techniques are not giving the fruitful result to

response to the keen competition. At present, manufacturing organizations

have to adopt advanced management accounting techniques.

88

Costs have central role in business policy of the company. Management of the

company has very serious task to analyze each decision with respect to future

costs which will occur as a result of decisions made. It is necessary to consider

this issue because, however much it seemed abundantly, cost management

becomes more and more important especially in the modern business

environment, characterized by uncertainty and constant presence of risk, the

economic crisis with the effects of recession, growing competition, increase in

prices of basic energy for initiation of production capacity, new regulations in

the field of ecology and social responsibility and changes in consumers

preferences. Thus, policy makers should pave the way for policy implanters to

select the model for decision making and test the sensitivity of the model with

alternative scenarios and judge which outcome best describes their beliefs

about the future. In the case given, decision makers should be able to test

whether changes in parameters and scenarios affect the product‟s profitability

and the business viability.

5.3.2 Recommendations to Managers

Our findings, although based on one company, will permit manufacturing company‟s

management to realize the importance of unit costs in order to make informed

financial decisions. The use of break-even analysis will allow area managers to plan

minimum production capacity for the organization. Thus as far as CVP analysis is

concerned the researcher puts forward the following recommendations;

It is recommended that for analysis cost control purpose, workers should be

enlightened on the objectives of the organization and department estimates as

89

this would inspire in them a sense of recognition of their corporate importance

by the management.

In today‟s modern world of businesses and corporations, there is a common

goal shared throughout every industry; increase profits. With increases in

technology and developing methods, businesses are moving far lengths in

increasing their profits, or operating income. Controlling costs is the key to a

successful operation. The Cost Volume Profit Analysis is the recommended

paramount and most cost efficient way of doing so. It is also highly

recommended for the decision makers to grasp the understanding of the

economic consequences of cost structure, contribution margin, and break-even

sensitivity, to enable a business to create a decision model that enhances the

company‟s profitability

A brief delineate is necessary in understanding the Cost Volume Profit

analysis (or CVP) and creating a decision model. In a very general outlook,

the CVP looks at how fixed, variable, and mixed costs change with changes in

sales volume. The main goal is to determine what factors control costs and see

how management can use this information to improve planning and control

activity. After establishing a base, it is necessary for the company to identify

all fixed, variable, and overhead costs. This is not an easy task, as what is to

be considered one category of cost may change in a different environment.

Also, CVP analysis is important in using both life-cycle costing and target

costing. In lifecycle costing, CVP analysis is used in the early stages of the

90

product‟s cost life cycle to determine whether the product is likely to achieve

the desired profitability. Similarly, CVP analysis can assist in target costing at

these early stages by showing the effect on profit of alternative product

designs that have different target costs.

If a business increases its selling prices, the demand for its products is likely

to fall, unless the price increase coincides with an effective marketing

campaign. Similarly, a fall in price should stimulate extra demand and hence

volume produced, unless the market is saturated or superior alternatives are

available. Managers need to know how contribution and profits will change as

a result of a change in a product‟s selling price and the consequent change in

its sales volume.

In recent years, the increasing level of global competition has intensified the

challenges for managers and many experts have warned that if management

accounting is to maintain its relevance, it needs to adapt to meet the changing

needs of managers. In response to these concerns, a range of new management

accounting techniques has emerged (Chenhall and Smith, 1998). Traditional

management accounting techniques, such as absorption costing, standard

costing, traditional budgets, CVP analysis and profit-based performance

measures, focus on concerns internal to the organization. The more recent

management accounting tools, such as activity based costing (ABC), target

costing, value chain analysis and benchmarking have affected the whole

process of management accounting (planning, controlling, decision making,

91

and performance evaluation) and have shifted its focus from a “simple” or

“naive” role of cost determination and financial control, to a “sophisticated”

role of creating value through improved deployment of resources (Kaplan and

Atkinson, 1998; Otley, 1995; Haldma and Laats, 2002). Briedley et al. (2001)

argue that “given that notions such as “current practice” and “current state”

are situated in time and space there is a continuous need for empirical studies

to keep track of development Horngren et al. (2000) note that firms across a

variety of industries have found the simple CVP model to be helpful in both

strategic and long-run planning decisions. Furthermore, a survey of

management accounting practices indicates that CVP analysis is one of the

most widely used techniques (Garg et al., 2003). However, Horngren et al.

(2000) warn that, in situations where revenue and cost are not adequately

represented by the simplifying assumption of CVP analysis, managers should

consider more sophisticated approaches to financial analysis.

To help managers make better decisions, accountants should evaluate the

quality of the techniques they use, given the organizational setting and

decisions to be made. This evaluation helps determine when techniques such

as CVP analysis are likely to be an appropriate tool and how much reliance to

place on the results. The quality of information generated from an analysis

technique is higher if the economic setting is consistent with the technique‟s

underlying assumptions.

Managers need to consider the degree of operating leverage when they decide

whether to incur additional fixed costs, such as purchasing new equipment or

92

hiring new employees. They also need to consider the degree of operating

leverage for potential new products and services that could increase an

organization‟s fixed costs relative to variable costs. If additional fixed costs

cause the degree of operating leverage to reach what they consider an

unacceptably high level, managers are advices to often use variable costs such

as temporary labor rather than additional fixed costs to meet their operating

needs.

5.4 Areas for Future Studies

This study is just an eye opener for more investigations to come. The following areas

are worth consideration.

This study is based on few structured questionnaire in survey and some secondary

data. The performance of CVP analysis in manufacturing companies in Tanzania as a

management tool has been considered. But there is huge number of cost management

tools. Relevance, challenges, usefulness and satisfaction level have been considered

but what are the reasons behind it have not been concentrated. If the study considered

the qualifications of it, the finding might be different. This study lacks consideration

of other management accounting techniques used as management tools and also the

level of the qualifications of them towards justification of their responses. Also

merely manufacturing organization has been considered. The study open for further

research could consider the usage and satisfaction levels of service organizations also.

The researcher is not satisfied with the responses given on the factors affecting CVP.

As it is stated previously; the questions on the issue were surprisingly not understood

93

by some respondents. Further research which should clearly define the factors is

much-admired. It is the thought of the researcher that clear understanding of the

factors affecting CVP will help academicians along with policy makers to extend or

adjust the model to meet the desires of decision makers as well as to make it a reliable

tool for decision making.

The market led technology system by itself reduces the role of state in technology

decision making for a country. It is, therefore, important to find out the role of

regulatory organs in technology transfer and adaptation in a free market economy.

Technology is rapidly changing, and companies which adopt most advanced

technologies, gain competitive advantage, thus it will also be of value to find out how

local companies can gainfully utilize opportunities created by global market in the

country in order to improve own technological capabilities.

94

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APPENDIX I:

QUESTIONNAIRE

Introductory part

Below are the questions for selected personal particulars. Circle the letter representing

the correct answer and if the correct answer is not provided, write the correct answer.

1. What is your sex?

a) Female

b) Male

2. What is your level of education? (indicate only the highest level)

a) Primary education

b) Ordinary secondary education

c) Certificate holder

d) Diploma

e) Bachelor degree

f) At least master degree

3. For how long have you been working with this organization?

a) Less than three yearS

b) 3 year -5 years

c) More than five years

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4. What is your current position in this organization?

Job title………………………… …….. Department………………………………….

Part A: General understanding of Cost Volume Profit analysis

Tick the correct answer

1. Do you know anything about Cost volume Profit analysis? (a) Yes (b)

No

2. Is it true that costs and revenue have linear relationship? (a) Yes (b) No

3. Is volume the only driver of costs? (a) Yes (b) No

4. Do you separate your operating costs into fixed and variable categories

(a) Yes (b) No?

5. Which factors affects cost volume profit analysis (give only one answer).

(a) Volume

(b) Unit selling price

(c) Variable cost per unit,

(d) Total fixed cost, and

(e) Sales mix.

(f) All the above

6. Among the factors stated in question five above, which factor affects CVP the

most? (Give only one answer).

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(a) Volume

(b) unit selling price

(c) Variable cost per unit,

(d) total fixed cost, and

(e) Sales mix.

Part B: CVP analysis and related challenges

1. Does your organization use cost-volume profit analysis as a tool for profit

planning and control? ? (a) Yes (b) No

2. If your answer in question 1 is yes, apart from cost volume profit analysis,

what other techniques do you employ in the profit planning and control?

(a) Budgeting (b) Return on investment(ROI) (c) Payback period (d) Net

present value (NPV) (d) Others

3. What problems does TPCC Company encounter in the profit planning and

control?

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

4. Are the problems mentioned in question three result from the use of CVP

analysis?

(a) Yes (b) No

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5. What is the main problem in using CVP analysis in decision making?

a) It is not understood

b) It is impracticable

c) It is difficult to apply

d) It is not effective

6. Do you use CVP analysis in long-term decisions making?

(a) Yes (b) No

Part C: CVP Analysis in Modern Business Environment

1. Which methods of production do you use? (give only one answer).

a) Capital intensive

b) labour intensive

c) capital and labour at equal mixture

2. What determines the price of your product (give only one answer).

a) production costs

b) demand and supply

c) competitor‟s price

d) combination of a, b, c and d above

3. Once the price is set, can it remain constant throughout the accounting period?

107

(a) Yes (b) No

4. Can CVP analysis help decision makers to measure the risks involved in the

business?

(a) Yes (b) No

5. Do you think CVP analysis is helpful in achieving your competitive goals?

(a) Yes (b) No

Part D: Budgeting and CVP Analysis

1. Do you consider the behaviour of costs in budgeting?

(a) Yes (b) No

2. Which type of budget do you use in the course of monitoring your operations?

(give only one answer).

a) Flexible budget

b) Static (master) budget

c) Both, flexible and static budget

3. Are budgets considered to be valuable tools in good management?

(a) Yes (b) No

4. Which type of budget can help decision makers to develop trends or the

pattern of business? (give only one answer).

a) Flexible budget

b) Static (master) budget

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c) Both, flexible and static budget

5. Which method other than budgeting is used to control costs or for

performance evaluation? (give only one answer).

(a) Return on investment (ROI)

(b) Payback period

(c) Net present value (NPV)

Part E: Performance evaluation with CVP Analysis

1. Is there periodic performance evaluation of your operations?

(a) Yes (b) No

2. What is the basis your performance evaluation? (give only one answer).

a) Static budget

b) Flexible budget

c) Both, flexible and static budget

3. In what ways explicitly has the use of cost volume profit analysis facilitated

the organization to achieve efficiency and effectiveness?

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

………………………

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4. Is relevant range considered when undertaking performance evaluation?

(a) Yes (b) No

5. What is the frequency for performance evaluation of your operations?

a) Annually

b) semi- annually

c) Quarterly

110

ANALYSIS OF PERFORMANCE OF COST VOLUME PROFIT (CVP)

ANALYSIS IN MANUFACTURING COMPANIES IN TANZANIA – A CASE

OF TANZANIA PORTLAND CEMENT COMPANY (TPCC))

BY

RAHABU PHILIP NDONGOLO

MASTER OF BUSINESS ADMINISTRATION

THE UNIVERSITY OF DODOMA

JUNE, 2013

111