CHAPTER ONE - College of Education and External Studies

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MAKERERE UNIVERSITY

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APROJECT REPORT SUMITED IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR AWARD OF DEGREE OF BACHERLORS OF

COMMERCE OF MAKERERE UNIVERSITY

June 2011

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DECLARATION

I, Wasike Daniel wamukota declare that the piece of work is my original effort and never

been submitted to any institution known to me for any award.

Signature…………………. Date………………………

Wasike Daniel wamukota

Reg No :07/u/15905/ext

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APROVAL

This is to certify that this report was done under my supervision

APROVED

MR KITALE CHRIS

SIGNATURE…………………….DATE……………….

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ABSTRACT

COST CONTOL TECHNIQUES AND PROFITABILITY IN MANUFACTURING FIRMS

The purpose of this study was to evaluate the relation between cost control techniques and

profitability in the Century Bottling Company. The study was guided by determining various

control techniques used examining profitability and analyzing the relationship between the cost

control techniques and profitability. Primary data from Century Bottling Company was used

through use of questionnaires, Secondary data by doing further reading through other authors

work by use of journal articles.

The findings revealed that there is a relationship between cost control techniques

and profitability

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DEDICATION

This book is dedicated to my late parents, jaja glades, brothers and sisters, friends for all the love,

financial support and encouragement the have given me during my studies and entire life.

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ACKNOWLEDGEMENT

Many people have given me support during my entire life and time of studies. am grateful to god

for gift of life

I also thank my supervisor Mr.KITALE CHRIS for his guidance and assistance that without him

this research would have not been successful.

I thank management of coco-cola plant for information they provided to me during my research

My sincere appreciation goes to my brother Julius for all the support he has provided me and

entire family.

Lastly I thank all my friends and all those who helped me during mi study and entire life .GOD

BLESS YOU ALL

vii

TABLE OF CONTENTS

DECLARATION .............................................................................................................................. i

ABSTRACT .................................................................................................................................... iv

DEDICATION ................................................................................................................................. v

ACKNOWLEDGENT .................................................................................................................... vi

INTRODUCTION ............................................................................................................................ 1

1.1 Background to the study ............................................................................................................. 1

1.2 Statement of the problem ........................................................................................................... 2

1.3 Purpose of the Study .................................................................................................................. 2

1.4 Objectives of the Study .............................................................................................................. 2

1.5 Research Questions .................................................................................................................... 2

1.6 Scope of the Study ................................................................................................................... 3

1.6.2 Subject scope ........................................................................................................................... 3

1.6.3 Time scope .............................................................................................................................. 3

1.7 Significance of the Study ........................................................................................................... 3

CHAPTER TWO .............................................................................................................................. 4

LITERATURE REVIEW ................................................................................................................. 4

2.0 Introduction ................................................................................................................................ 4

2.1 The concept of Cost Control ...................................................................................................... 4

2.2 Various techniques used in Cost Control ................................................................................... 4

2.2.1 Standard Costing ..................................................................................................................... 4

2.2 Budgetary control ....................................................................................................................... 6

2.2.3 Other Cost Control Techniques ............................................................................................... 8

2.2.4 Profitability ............................................................................................................................ 10

2.2.5 Concept of Profitability ......................................................................................................... 11

2.2.6 Measurement of Profitability ................................................................................................ 12

CHAPTER THREE ........................................................................................................................ 15

METHODOLOGY ......................................................................................................................... 15

3.0 Introduction .............................................................................................................................. 15

3.1 Research Design ....................................................................................................................... 15

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3.2 Study population ...................................................................................................................... 15

3.3 Sample size ............................................................................................................................... 15

3.4 Data Type ................................................................................................................................. 15

3.5 Data Sources ............................................................................................................................. 15

3.6 Data Collection Method ........................................................................................................... 16

3.6.1 Interview ................................................................................................................................ 16

3.6.2 Questionnaires ....................................................................................................................... 16

3.7 Data Analysis ........................................................................................................................... 16

3.8 Data Presentation ...................................................................................................................... 16

3.9 Limitations to the Study ........................................................................................................... 16

CHAPTER FOUR .......................................................................................................................... 17

PRESENTATION AND INTERPRETATION OF THE FINDINGS ........................................... 17

4.1 INTRODUCTION .................................................................................................................... 17

4.2 Costs Control Techniques Used ............................................................................................... 17

4.2.1 Budgets .................................................................................................................................. 17

4.2.2 Standard Costing ................................................................................................................... 20

4.2.3 Bench Marking ...................................................................................................................... 23

4.2.4 Inventory Management ......................................................................................................... 24

4.2.5 Just in time s .......................................................................................................................... 26

4.2.6 Target Costing ....................................................................................................................... 27

4.2.7Total Quality Management (TQM) ........................................................................................ 28

CONCLUSIONS AND RECOMMENDATIONS ......................................................................... 32

5.1 Introduction .............................................................................................................................. 32

5.2 Conclusions .............................................................................................................................. 32

5.2.1Cost Control Techniques ........................................................................................................ 32

5.2.3 Profitability ............................................................................................................................ 33

5.2.4 Cost Controls techniques and Profitability ............................................................................ 33

5.3 Recommendations .................................................................................................................... 34

Areas for further research ............................................................................................................... 35

APPENDIX .................................................................................................................................... 37

1

CHAPTER ONE

INTRODUCTION

This chapter will contain the background to the study, objectives of the study, research questions,

scope of the study, and significance of the study.

1.1 Background to the study

Cost according to Lucey (1996) is the amount of expenditure actual or notional incurred on or to

a specified product or activity. Cost control in manufacturing firms means that control of all

items of expenditure by regular and frequent comparisons of actual expenditure with

predetermined standards. This means that undesirable trends away from the standard can be

detected and corrected at the early stage, (Horngren, 2002).

Profitability is the total net gains from the business, which exceeds interest on capital at current

rates (Marshall, 1998). Profit is regarded as the most common and theoretically plausible

objective of business firms to the extent that some firms take it as the only objective (Dwivedi,

2002). As per Lipsy (2006), to an accountant, profit means the difference between total receipts

and total costs of producing commodities. To the economic sense, profit means net increase in the

wealth which is cash flow plus change in the value of the firm’s assets, (Pandey, 2005).

According to Arora (1995), cost control techniques aims at improving efficiently by controlling

and reducing costs to the lowest profitable figure. If the selling price remains constant, the

reduction of costs involved results in a greater profit. When the commodities produced are sold,

cost control as a preventive function aims to prevent costs from exceeding the predetermined

target. In order to et an adequate return on capital employed, its essential to aim at minimum cost

and maximum quality bearing in mind the price charged (atty, 2000).

Coca , cola is one of the largest beverage company in the world, in Uganda it secured a century

bottling company limited during 1995, its production centers are located in Namanve Kampala

Jinja high way and other production centre in Mbarara, by 1996 the company was producing 720

cases per day and today produces around 23000 cases per day. The company employees around

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679 employees. The company has a number of products including Coco, Fanta orange, Fanta

passion, Fanta lemon, sprite among others. The main costs incurred in production include

production, human resource, finance, procurement among others.

1.2 Statement of the problem

Cost control techniques aim at improving efficiency by controlling and reducing costs to the

lowest profitable figure Arora (1995). This implies that where there are cost controls techniques,

firms are expected to have high levels of profitability. In addition firms using the same cost

controlling techniques are expected to have the same level of profitability. However, many firms

using the same cost controlling techniques have had varying levels of profitability (Lucey, 1996).

Some have even gone to the extent of making losses while others are continuously making losses.

In the coca cola company, despite using the same cost controlling techniques, the value of profits

keep changing that is, either higher or lower. I would like to find out if there is any relationship

between cost control and profitability and what actually causes the variations in profits.

1.3 Purpose of the Study

The study was aimed at finding the relationship between cost control techniques and profitability

in manufacturing firms and recommendations were made.

1.4 Objectives of the Study

i. To determine the various cost controlling techniques used by Century Bottling

Company.

ii. To examine how profitability is measured in Century Bottling Company

iii. To analyze the relationship between cost control techniques and profitability.

1.5 Research Questions

i. What are the techniques used in cost control in Century Bottling Company?

ii. How is profitability measured in Century Bottling Company?

iii. Is there a relationship between cost controls techniques and profitability?

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1.6 Scope of the Study

1.6.1 Geographical scope

The study will be conducted in Coca-cola plant in Namanve along Jinja Kampala highway.

1.6.2 Subject scope

The study will focus on the relationship between cost control techniques and profitability.

1.6.3 Time scope

The research will be conducted between May 2010 and June 2011.

1.7 Significance of the Study

Manufacturing firms will be able to choose the most appropriate cost control technique

which has the lowest operation costs to increase their profits

The study will widen the researcher’s knowledge on cost control techniques and

profitability.

Future researchers will use the research as a source of data. The data provided will be

secondary data.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter looks at the concept of cost control, techniques of cost control, concept of

profitability, measurement of profitability, the relationship between cost control and profitability.

2.1 The concept of Cost Control

Harper (2007) defined a cost as the value of economic resources used as a result of producing .

Horngren (2007) defined a cost as a sacrifice made for goods and services. That is, cost may

result into increase in liability or decrease in assets. Horngren (2002) looked at cost control

techniques as a control of all items of expenditure by regular and frequent comparisons of actual

expenditure with predetermined standards. He also added that the aim of this control is to detect

and correct any undesirable trend from the standard. Arora (1995) further looked at cost control

as a function of keeping costs to confirm to planned costs. Pizzey (1999), also defined cost

control as a regulation of executive action of costs of operating and undertaking, particularly

where such action is guided by cost accounting. He further said that it involves control of

material usage and material prices of wage costs, separating the effect of efficiency from rates of

pay, of maintenance and service costs of all the other items of direct expenses.

2.2 Various techniques used in Cost Control

2.2.1 Standard Costing

According to Saleemi (2001), standard costing is a technique of cost control which compares the

standard cost of each product and service with actual cost to determine the efficiency of operation

so that any action may be taken immediately.

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Horngren (2001), said that costing is carefully predetermining of standards costs, which are target

costs that is cost should be attained. Standard costs are the building blocks of flexible budgetary

and feedback system. These costs help to build budget gauge performance, save book keeping

costs and obtain product costs. Pizzey (1999) said, standard costing is the name given to a

technique where standard costs are predetermined and subsequently compared with the actual as

recorded.

Owler (2004) said that standard costing is a method of ascertaining costs whereby statistics are

prepared to show the standard costs, the actual costs, and the difference between these costs that

is variance is there after calculated. Standard costing is a system of cost accounting which makes

use of predetermined standard costs relating to each element of cost, that is, labour, material and

overheads for each unit of product manufactured or service offered, (Batty 2000). Arora (1995)

said that standard costing is simply the name given to a technique where by standard costs are

computed and subsequently compared with actual costs to find out the difference between the

two. He further defined it as a technique of cost accounting which compares standard costs of

each product or service with the actual costs to determine the efficiency of the operations so that

any remedial action may be taken immediately.

Lucey (1996) defined standard costing as a technique which establishes predetermined estimates

of the costs of the product and services and then compare the predetermined costs with actual as

standard costs and the difference between the standard costs and actual costs is known as

variance. According to him, there are three types of standards that is, basic standards, ideal

standards and attainable standards. Basic standards are long term standards which would remain

unchanged over years. There sole role is to show trends over time for such items as material

prices, labour rates and efficiency and the effect of changing method which is a standard

established for use over a long period from which a current standard can be developed. Ideal

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standards are standards which can be attained under the most favorable conditions with no

allowance for normal losses, waste and machine breakdown also as a potential standard.

Attainable standards are based on efficient operation conditions an attainable standards is one

which can be attained if a standard unit of work carried out efficiently, a machine properly

operated or material properly used, allowances are made for normal loses, wastes, and machine

break times.

Standard costing has been traditionally considered a very useful technique in planning and

control, product costing and performance evaluation (Sulaiman et al 2004). According to

Michelle (2005), standard costing provides a number of benefits in performance evaluation.

Standard cost variables provide feedback information designed to help managers control

operations in accord with the plans they have set. They highlight the difference between the

planned costs of a period and actual costs incurred that time.

Since mid 1980s, standard costing has come under intense criticism, (Sulaiman 2005). A number

of researchers have reported that as a result of changing manufacturing environment, the

applicability of standard costing and variance analysis is decreasing as a planning and control

technique. Contrary to the above views, empirical evidence indicates that many companies are

using standard costing for decision making product costing, planning and control and

performance evaluation both in developed and developing countries, (Lyall & Grahan 1993: Joshi

2001)

2.2 Budgetary control

Pandey (1995) went further to explain a budget as a comprehensive and consistent plan expressed

in financial forms showing operations and resources of an outputs for some specific period in our

future. Pandey also cited basic elements of a budget to include a comprehensive and consistent

programme, expresses in financial terms, a plan for the firm’s operations, resources and future

plan for a specific period.

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For Brench (1993) he defines a budget as a reflection of management intentions while it is

referred to as quantified plan by Horrigen (1996).

Therefore a budget is a management technique used to control income and expenditures and

indicates that performance expected of employees who may therefore be used to serve as an

index for measuring of the level of profitability and fund utilization in the organization.

Frank Wood (1999) said that budgets are drawn up for control purposes. The budget is used as a

guide and not a straight jacket. The author added that budgets show the action that management is

taking to influence future events. For example if its aim is to increase sales, its shown by the sales

budget. Wayne (2003) looked at budgets as a means of motivation, that is, they provide guide to

action where various managers can know what is expected of them, provide the basis for

performance evaluation by spelling out what employees should do and when to do it and

promotes coordination and communication. Pizzey (1999) however said that budgets are based on

an anticipated actual level of costs. These controls may be applied in such businesses as in

jobbing where standard costing is impossible. Incomes and expenditures are controlled by means

of predetermined budgets.

Saleemi (2001) defined budgets as financial or qualitative statements prepared and approved

prior to a define period of time. Budgets may be prepared for departments, business as a whole or

functions such as sales and production. He said that budgetary control is a management technique

which is adopted to control the business more effectively and it involves planning in advance of

various functions of a business on how they can be controlled. Owler (2004) said that budgetary

control is the establishment of budgets relating to the responsibilities of executives tot eh

requirements of a policy and the continuous comparison of actual with budgeted results either to

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secure by individual action the objective of that policy or to provide a basis of its revision. Lucey

(1996) said that budgetary control is a process of comparing actual results with planned results

and reporting on variations. That it involves setting a control frame work which helps expenditure

to be kept with in agreed limits. Deviations are noted so that corrective action can be taken. Frank

Woods (1999) gave various types of budgets to include; sales budgets, production budgets, raw

material budgets, cash budgets and forecasted budgets.

Arora (1995) said that budgetary control is a system of controlling costs through budgets.

Budgeting is thus only a part of budgetary control. He further defined budgetary control as the

establishment of budgets relating to the responsibility of executives of a policy and the

continuous comparison of actual with budgeted results, either to secure by individual action the

objectives of the policy or to provide a basis for its revision. Some of the objectives of budgetary

control are planning, coordination and control.

Planning is the provision of a detailed plan of action for a business over a defined period of time.

Coordination aids managers in coordinating their efforts so that objectives of the organization as

a whole are harmonized with the objectives of its parts. Control is necessary to ensure that plans

and objectives as laid down in the budget are being achieved.

2.2.3 Other Cost Control Techniques

Anthony (2003) suggested that in management of costs, the specific cost elements have to be first

identified as either controllable or non controllable. An element of costs is controllable according

to the author if the amount of cost incurred or charged to a responsibility centre is significantly

influenced by the actions of the manager of that responsibility centre. The author suggests that

non controllable costs can be changed into controllable centre. The author suggests that non

controllable costs can be changed into controllable costs by; changing the locus of responsibility

for decision, changing the management control system. Flippo (2005) gives the following as the

9

major concern in management especially of labor costs. Contract and piece rate employment. He

suggests that the control costs personnel may be recruited on contract basis to avoid redundancy,

or remuneration should be done on basing on the tasks performed. Downsizing could also be

another technique for cost control Kazloswki et al (2003) says that downsizing refers to

deliberate decision to reduce the work force hence improving organizational performance. Stoner

(2000) said that downsizing is the reduction of the number of workforce in order to attain

efficiency, productivity and quality which can help maintain a profit level acceptable to the

shareholders.

Employee profit sharing (Flippo, 2005) states that an element in which employees may be paid in

relation to the profits at a predetermined rate, they will be motivated to work harder hence

leading to lower costs. Variable compensation of individuals or groups. The costs incurred to

reward the labor force should vary according to the contribution in terms of benefits of the

organization.

Morse (2002) suggested the following approaches in management and control of costs.

Coordination of the development of the budget, designing, installing and maintaining the cost

accounting system, preparing reports for external users, internal auditing, accumulating and

analyzing performance reports, providing information for special decisions. The author states that

to be able to perform the above, there is need to have a position of the controller who has the

overall responsibility for all cost accounting activities within the organizations. Morality (2004)

suggested the following considerations; Proper matching of the cost data gathered according to

the period costs centre products, eliminate the effect of changing prices, the objective to predict

and manage future costs, any changes in the prices of inputs should be incorporated in the data

collected, eliminate un representative periods, balance the cost benefit of more accurate

10

information, ensure constant technology depending on the rate of technological changes in the

firm, the accountant should vary data of few or old years.

2.2.4 Profitability

Profitability is a measure of return your business creates after operating and other expenses are

subtracted from income. An income statement helps in determining if your enterprise ideal will

be profitable. It records all business receipts and expenses related to the years of production,

expenses are then subtracted from receipts the resulting amount being the net income. Net income

is the measure of profitability and represents the return on the operators labour management time

and equity. When an annual income statement is prepared, the progress of the business can easily

be analyzed plus it becomes an indispensable part of your business plan or loan proposal. It also

helps in preparation of a tax plan (Lossel, 2000).

Dwivid (2002) says that profit means different things to different people. It means differently to

businesses, accountants, tax collectors, workers and economists. In business, profit is the income

accruing to equity shareholders in the sense that as wages accrues to labor, rent accrues of rental

assets and interest accrues to money lenders. To an accountant, profit means the difference

between the total revenues and total costs. He also said that for all practical purposes, profit or

business income means profits in the accounting sense plus allowances. That is, Total revenue –

Total costs = profit.

According to Jennings (2000), profitability is the relationship between profit and the resources

employed in earning it. A subsidiary measure of profitability is the relationship between gross

profit and net profit to sales while Salmonson (2002) stated that profitability is the ability of the

firm to operate income and it is reflected in the firm’s income statement. Generally, all those

interested in the affairs of the firm are interested especially in its profitability.

11

According to Edward (2004), profitability is a very important measure of a firm’s operating

success. There are two areas of concern when judging profitability; The relationship in the

income statement that indicates the firm’s ability to recover costs and expenses. The relationship

of income to various balance sheet measures that indicates the firm’s relative availability to earn

income on assets employed.

2.2.5 Concept of Profitability

Profitability is a measure of return your business creates after operating and other expenses are

subtracted from income to obtain net income. Net income is a measure of profitability and

represents the return on the operator’s labor management time and equity. (Lossel, 2000). Income

is the payment you receive in exchange for your goods and services. Steps followed to ensure that

all sources of income are included in the income statement. In the income statement, estimate the

value of your sales, include the size of the business you plan to operate in, adjust for changes in

accounts receivables, adjust for changes in productive inventory, an estimate of the future recipes

in a series of income statement for future years must be developed to analyze profitability

(Robinson, 1999).

While estimating expenses, the following steps are followed, Estimate what will it cost to

produce your goods and services, include the operating and depreciation, adjust for accounts

receivables, and account for changes in inventory by counting your inventory supplies and

charging their cost the year in which they are used not in the year they were bought. Calculate

labor and marketing expenses, assess the share of shared costs, estimate future expenses by

preparing a series of income statements in order to assess profitability of the firm, (Robinson

1999)

12

Further more, the income statement can be used to perform sensitivity analysis. What effect do

changes in prices and yields have on profitability? By completing this financial analysis on your

proposed business, you are able to have information needed to make an informed business

decision. It is important to note that several other methods can be used to determine whether a

business opportunity is profitable or not and these include; payback period, net profit value,

average rate of return on investment among others (Lossel, 2000).

2.2.6 Measurement of Profitability

Pizzey (1999) said that profits can be measured in terms of gross profit. He also noted that the

primary aim of a commercial business is to make profits and that this profit is the excess of

selling price and costs. Any excess the producer derives depends on the ability to control costs.

Gross profit = Selling price – (production costs + Selling costs + Administrative costs) Vanhorne

(2002) quoted that profits can be measured in different ways depending on how it’s perceived. He

said that profit is deemed realized when managers invest proceeds in treasury bills and that this

would imply, profits had been maximized and that the excess can be reinvested. Arora (1995)

said that profits can be measured by subtracting total costs of materials, labour and other

operating expenses. This compared with total revenue which is a result of output and price. It

implies that if total revenue exceeds total revenue which is a result of output and price. It implies

that if total revenue exceeds total costs, net profits will be realized.

Dwividi (2002) said that profits can be measured in terms of net profits. He said that profit is got

from excess of revenue over production costs including both manufacturing and overhead

expenses. If a positive difference is got, net profit is realized and if a negative difference is got,

net loss is realized. Pandey (2008) noted that profit measurement is one of the most difficult

issues facing the accounting profession. He said that this can be handled by applying Generally

13

Acceptable accounting Principles (GAAP). The principles are compromised by lack of financial

support and political influence. Profits can be measured in terms of gross or net profits or total

profits in that the total profit is the same as the gross profit. Fama & French (2000) used the ratio

of earnings before interest but after taxes over assets as a measure of profitability. They

forecasted profitability with year by year gross section regressions and they used the average

slopes and their time series standard errors to draw inferences.

Smith (1998) said that profitability metrics measure the return that the firm’s owners receive

from their investments. He advocated for the use of return on assets and net profit margin to pain

a firm’s profit picture. Besides, cost drivers can also be used in forecasting profitability at various

levels of operations to enable the firm plan its future activities better since the cost drivers and

their relationship to costs should be known prior to planning in order to predict the profitability.

The simplest way of exploiting the knowledge of cost drivers and their associated costs is to use a

unit level analysis. This type of analysis although it has many limiting features, allows a

framework for organizing data for planning (Dale Robinson, 2000).

The profit associated with a product is equal to its total revenue minus total costs and revenues

are function of unit selling price multiplied with volume of sales. This can be used to create

contribution margin income statements for the firm. This type of income statement which

separates the company cost by behavior at the unit level (fixed or variable), can be used to focus

attention on the contribution margin at various levels of production. In this type of statement,

fixed manufacturing costs are excluded from inclusion in margin calculation where as variable

selling and administration costs are included in the margin calculation (Lossel, 2000).

14

2.3 Relationship between Cost Control and Profitability

Dwividi (2002) profit is got by;

Total revenue – (Wage + rent + cost of material)

The total of variables in brackets is the total costs. This implies that total revenue – total costs is

equal to profitability. He also added that if these costs are maintained at the lowest, there will be

profit maximization but if they are not maintained at the lowest, there will be limited profits.

Manufacturing firms end up with losses when total costs exceed total revenue.

Horngren (2002) said that variable costs are subject to various degrees of control where when

effective control is put in place, there is increase in profitability. Where poor controls techniques

are in place, there is decrease in the level of profitability which affects the performance of

manufacturing firms. Pandey (2005) said that also management affects profitability. In case of

good effective management, its possible to realize high profits and low profits incase higher

prices are charged due to high demand, higher profits are got.

15

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter contains the research design, data type, data sources, data collection method, data

analysis, data presentation, limitation to the study.

3.1 Research Design

The researcher used a descriptive, analytical and narrative research design determining the

relationship between cost control and profitability in manufacturing firms.

3.2 Study population

The researcher used Coca-cola as the case study and the main population composed of employees

and management of Coca-cola plant.

3.3 Sample size

The researcher used 50 employees as his sample size.

3.4 Data Type

The data involved both secondary and primary data. The secondary data was theorized by

different authors on the study of the variables. The primary is the one I got from century bottling

company in Namanve.

3.5 Data Sources

Data was obtained from both secondary and primary sources. Secondary source include, journal

articles, online sources, text books, primary data was obtained from century bottling company in

Namanve. This was from the management accountant.

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3.6 Data Collection Method

3.6.1 Interview

Interviewing of different people within Coca-cola plant helped the researcher to get the necessary

information.

3.6.2 Questionnaires

Open ended questions which required the respondents to fill also helped the researcher to acquire

the necessary information.

3.7 Data Analysis

Data was analyzed by making references to the available existing literature and comparing it with

data collected from Coca Cola Company. Also comparisons and contrasts were made in relation

to work in different scholars.

3.8 Data Presentation

Data was presented in a narrative form which clearly brought out the relationship between cost

control techniques and profitability in manufacturing firms. A few computations were included

too.

3.9 Limitations to the Study

I encountered the following problems during the study.

Inadequate time frame required for a detailed study. Had to study, revise for exams and

also carry out the research. I over came this carrying out part of the research during

holidays.

Difficulty in accessing the required information from century bottling company. Had to

wait for some two weeks and also, values, of sales and profits would not be disclosed.

The resources were a constraint due to limited finances for printing and typing the work,

transport daily to century bottling company.

17

CHAPTER FOUR

PRESENTATION AND INTERPRETATION OF THE FINDINGS

4.1 INTRODUCTION

This chapter covers different costs control techniques used, measurement of profitability and

analysis of the findings from cocoa cola.

4.2 Costs Control Techniques Used

Technique one:

4.2.1 Budgets

Question 1:

The question on whether the organization prepares budgets had the following responses:

Response No. of Respondents Percentage

SA 40 80

A 8 16

NS 2 4

D - 0

SD - 0

TOTALS 50 100

Table One: Primary Source

From the above, 80% of the respondents strongly agree that the organization prepares budgets,

16% agree while 4% are not sure, none of the respondents do strongly disagree or agree,

therefore this indicates that Coca Cola company always uses budgets as a control technique.

18

Question 2:

The company spends according to the budget had the following responses:


SA 31 62

A 10 20

NS 6 12

D 3 6

SD - 0

TOTALS 50 100

Table Two: Primary Source

From the above, it indicates, that 62% strongly agree, 20% agree, 12% are not sure and 6%

disagree. Therefore, this is an indication that the company spends within the limits of the budget.

Question 3:

The company compares its previous budgets while preparing new budgets.


SA 33 66

A 8 16

NS 4 8

D 3 6

SD 2 4

TOTALS 50 100

Table Three: Primary Source

From the above, 66% strongly agree, 16% agree, 8% are not sure, 6%disagree and 4% strongly

disagree. Therefore the responses indicate that the budgets are prepared in comparison with

previous budgets as it is presented by Lucey (1996) said the budgetary control is a process of

comparing actual results with planned results and reporting variation

19

Question 4:

All departments are involved in budget preparation


SA 20 40

A 12 24

NS 8 16

D 7 14

SD 3 6

TOTALS 50 100

Table Four: Primary Source

64% strongly agree, while 20% disagree and 16% are not sure whether all departments are

involved in budget preparations. This was therefore an indication that organization involves all

departments while preparing its budgets.

Question 5:

Whether the company experiences deviation in their budgets, this question had the following

responses.


SA/A 18 36

NS 5 10

D/SD 27 54

TOTALS 50 100

Table Five: Primary Source

Much as the company is expected to spend within the budget line, the responses indicate that

54% of the respondents disagreeing, this could be as a result in the increase of the a dollar and

inflation, 36% agree while 10% are not sure if the budget deviations within the organization.

20

Question 6:

Measures put in place to control the budget deviations


SA/A 20 40

NS 13 26

D/SD 17 34

TOTALS 50 100

Table Six: Primary Source

From the above, 40% strongly agree that there are measures put in place to control the budget

deviations, 26% are not sure and 34% disagree. This indicates that well as 40% is a small

margin, but in over all, there are some measures that are in place to control the budget deviations.

4.2.2 Standard Costing

Technique Two:

Question 7:

The company predetermines the costs that are to be incurred.


SA/A 32 64

NS 7 14

D/SD 11 22

TOTALS 50 100

Table Seven: Primary Source

The above indicate that 64% of the respondents agree that costs are predetermined which is in

line with Horgen (2001) that said that costing is careful predetermining of the standard costs.

While 22% disagree and 14% are not sure.

21

Question 8:

There is a committee that sets standard costs.


SA/A 25 50

NS 12 24

D/SD 13 26

TOTALS 50 100

Table Eight: Primary Source

Regarding whether there is a committee for setting standard costs, 50% of the respondents

agreed, 24% are not sure and 26% disagree. This brings attention that all members of the

organization are not really aware if there is a committee that sets standard costs though the

majority of 50% agree that there is a committee or a person in charge of setting standards.

Question 9:

Comparison of predetermined costs with actual costs incurred had the following responses.


SA/A 31 62

NS 6 12

D/SD 13 26

TOTALS 50 100

Table Nine: Primary Source

From the above, it indicates that the costs are compared with predetermined costs as it is

indicated by 62% which is in line with Pizzey (1999), he said that standard costing is a name

given to a technique where standard costs are predetermined and subsequently compared with

actual as recorded, while 26% disagree and 12% are not sure if the comparisons are made.

22

Question 10:

Whether there is a basis of determining standard costs.


SA/A 40 80

NS 3 6

D/SD 7 14

TOTALS 50 100

Table Ten: Primary Source

It was established that 80% of the respondents agree that the costs have a basis of being

predetermined. 80% which is in line with Lucey (1996). According to him, there are three types

of costs, that are ideal, basic and attainable standards which mainly looks at material prices,

labour rates, and machine breakdown. 14% disagree and 6% are not sure.

Question 11:

The company always revises standards had the following responses.


SA/A 21 42

NS 2 4

D/SD 27 54

TOTALS 50 100

Table Eleven: Primary Source

From the above, most respondents disagree with frequent revision of standards with the

percentage of 54% while 42% agree and 4% are not sure

23

4.2.3 Bench Marking

Technique Three:

Question 12:

The company compares its products with those of its competitors in order to improve its

products quality.


SA/A 40 80

NS 2 4

D/SD 8 16

TOTALS 50 100

Table Twelve: Primary Source

It was established that 80% of the respondents agree that the company compares its products to

improve its quality in order to gain competitive advantage over its competitors, while 4% are not

sure and 16% disagree with other respondents.

Question 13:

The company uses different departmental innovations to improve its overall product quality


SA/A 32 64

NS 10 20

D/SD 8 16

TOTALS 50 100

Table Thirteen: Primary Source

It was established that 64% of the respondents agree that there is sharing of departmental

innovations to improve overall product quality while 16% disagree and 20% are not sure.

24

4.2.4 Inventory Management

Technique Four:

Question 14:

There is inspection of products quality before they enter the store.


SA/A 42 84

NS 5 10

D/SD 3 6

TOTALS 50 100

Table Fourteen: Primary Source

The information indicates that the products are inspected before they are accepted as it is

indicated by 84% while 10% are not sure and 6% do disagree.

Question 15:

Stock taking often takes place


SA/A 41 82

NS 3 6

D/SD 6 12

TOTALS 50 100

Table Fifteen: Primary Source

From the above, I was realized that there is frequent stock taking with the support of 82 from the

respondents while 6% were not sure while 12% disagree of frequent stock taking.

25

Question 16:

The company keeps stock records and there is verification of stock documents.


SA/A 39 78

NS 6 12

D/SD 5 10

TOTALS 50 100

Table Sixteen: Primary Source

78% of the respondents agree that there is verification of documents and maintenance of the stock

records while 12% are not sure and 10% disagree hence, this indicates that there is proper

verification of documents and maintenance of stock records within the Coca Cola plant.

Question 17:

Release of stock with supporting documents and their security.


SA/A 37 74

NS 5 10

D/SD 8 16

TOTALS 50 100

Table Seventeen: Primary Source

It was established that 74% agree, 10% are not sure and 16% disagree. This implies that there is

enough security of stock and products are released from the store with supporting documents.

26

4.2.5 Just in time s

Technique Five:

Question 18:

Products are produced just in time with zero inventories.


SA/A 5 10

NS 0 0

D/SD 45 90

TOTALS 50 100

Table Eighteen: Primary Source

It was realized that 90% strongly agree, 10% agree that indicated that the company keeps high

levels of inventory and production is not done just in time.

Question 19:

Production with zero defects


SA/A 12 24

NS 3 6

D/SD 35 70

TOTALS 50 100

Table Nineteen: Primary Source

The 70% of the respondents disagree, 6% are not sure while 24% agree. This shows that

production is done some times with some defects for example breakdown of bottles.

27

4.2.6 Target Costing

Technique Six:

Question 20:

The company always targets the price that the customer is willing to pay.


SA/A 20 40

NS 12 24

D/SD 18 36

TOTALS 50 100

Table Twenty: Primary Source

From the above, 40% of the respondents agree, 24% are not sure and 36% disagree. This helps to

realize that although customers are always complaining of the prices, they are always willing to

pay.

Question 21:

Target prices help the company in determining target costs and profits.


SA/A 40 80

NS 3 6

D/SD 7 14

TOTALS 50 100

Table Twenty one: Primary Source

From the above, 80% of the respondents agree, 6% are not sure and 14% disagree. These results

show that the target prices help Coca Cola to determine target profits.

28

4.2.7 Total Quality Management (TQM)

Technique Seven:

Question 22:

The standards of the quality are put in place.


SA/A 47 94

NS 3 6

D/SD 0 0

TOTALS 50 100

Table Twenty two: Primary Source

From the above, 94% agree, while 6% are not sure, this implies that there is overall maintenance

of quality at all levels within Coca Cola plant.

SECTION B:

PROFITABILITY

Question 23:

Unit prices are determined basing on unit costs incurred.


SA/A 35 70

NS 10 20

D/SD 5 10

TOTALS 50 100

Table Twenty Three: Primary Source

From the above, 70% do agree, 20% are not sure and 10% disagree that unit prices are

determined basing on unit costs. Therefore, this indicated that prices are determined basing on

their unit costs.

29

Question 24:

Pricing of the products depends on the prevailing demand and that of competitors.


SA/A 44 88

NS 3 6

D/SD 3 6

TOTALS 50 100

Table Twenty Four: Primary Source

The respondents shown that the pricing of company products always depends on that of

competitors and the prevailing demand of the product as it is indicated by 88%. This can be

further witnessed that most sodas have the same prices irrespective of the company producing

them, 6% disagree and they are not sure respectively.

Question 25:

Coca Cola is making profits.


SA/A 40 80

NS 8 16

D/SD 2 4

TOTALS 50 100

Table Twenty Five: Primary Source

The 80% agreed that the company is making profits; this is shown by continuous expansion of

the company market and the general overall growth while the 16% and 4% are not sure and

disagree respectively of whether the company is making profits.

30

SECTION C

RELATIONSHIP BETWEENs CONTROL TECHNIQUES AND PROFITABILITY.

Question 26:

The changes in the costs of production affect productivity.


SA/A 35 70

NS 5 10

D/SD 10 20

TOTALS 50 100

Table Twenty Six: Primary Source

From the above, 70% do agree that changes in costs of production affect the profitability levels of

the company while 10% and 20% are not sure and do disagree respectively.

Question 27:

Have the Cost Control Techniques improved profitability levels?


SA/A 42 84

NS 4 8

D/SD 4 8

TOTALS 50 100

Table Twenty Seven: Primary Source

It was established that 84% do agree that use of cost control techniques while 4% respectively are

not sure and do disagree

31

Question 28:

Low levels of profitability are due to the weaknesses of the cost control techniques.


SA/A 30 60

NS 5 10

D/SD 15 30

TOTALS 50 100

Table Twenty Eight: Primary Source

From the above, 60% do agree, 10% are not sure and 30% disagree. This implies that the

weaknesses in the cost control techniques greatly affect the profitability levels.

32

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter presents conclusions and recommendations that are based on findings of the

study. It also covers any other areas of study.

5.2 Conclusions

5.2.1Cost Control Techniques

A company should put in place an effective cost control technique depending on its nature,

activities, resources and ability. With these techniques in place, desired results are expected to be

achieved.

The cost control techniques used should be applicable in all sections of the organization for

example all departments and all members should be accountable in order to achieve a high and

desired level of profitability.

Having cost controlling techniques in place helps to protect the company’s assets, management of

risk, and maintenance of proper accounting records, prevention and detection of fraud as well as

enhancing accountability. Effective cost controls also promote compliance with the law and

regulations and therefore lead to efficiency in operations.

33

5.2.3 Profitability

Profitability of any business organization can be determined by use pf various profitability ratios

and methods depending on the most appropriate method for a particular organization. These

ratios and methods clearly indicate the return on capital employed or invested in the business.

An organization should set a particular level of profitability it aims to achieve for a particular

period. This will keep it focused on achieving that level of profitability hence fulfilling

organizational goals.

5.2.4 Cost Controls techniques and Profitability

Cost control techniques if effective and well designed enhance the level of profitability in the

firm. Cost controls assist in detection and prevention of fraud and errors. This therefore mitigates

fraudulent practices of managers leading to an improved level of profitability of the organization.

Techniques like budgets help the organization to plan in advance the costs and level of

profitability expected to be earned.

Effective cost control techniques like budgets, benchmarking, target costing, inventory

management, standard costing, downsizing, and use of tenders among others create a favorable

environment for an organization to maximize its business advantage and make more profit thus

enhancing the return on their investor’s funds.

It can therefore be concluded that cost control techniques and profitability have a direct

relationship. If controls are in place, a better level of profitability is achieved and where there are

not costs controls or where controls are ineffective, a low level of profitability will always be

experienced.

34

5.3 Recommendations

To improve on cost controls, manufacturing firms should focus their effort on the following;

The control environment, risk assessment, control activities, information, communication and

monitoring.

Segregation of duties, authorization of organizational structure internal and external audits,

physical restrictions, and documents should be put in place and emphasized to enhance efficiency

and effectiveness.

A policy should be put in place for heavy punishment for employees who manipulate the cost

control techniques in place.

Firms should always ensure that they achieve profits with in the requirements set for example in

the budgets. This can be done by computing various profitability ratios to find out whether they

are operating efficiently so as to identify the gaps and set ways to close them.

The organization’s level of profitability should always be matched with the efficiency of cost

control techniques and the causes of deviations or gaps determined. To compute the level of

profitability, analytical procedures should be utilized that is, those based on two or more fiscal

periods.

35

Areas for further research

The relationship between internal controls and organizational performance.

The effect of Auditing in the accounting Profession.

The relationship between record keeping and financial reporting

36

REFERENCES

Arora M. N (1995), Cost accounting principles and practice, 4th

edition, Vikas publishing house.

Batty (2000), Cost and management accounting for students, 3rd

edition, Institute of cost and

management accounting.

Dwividi (2002), Managerial Economics, New Delhi, 6th

edition, Vikas Publishing House.

Frank Woods and Alan Sangster (1999), Business Accounting two, 8th

edition, Printice Hall.

Harper. W.M (2007), Cost and Management Accounting, London, Low priced edition,

Macdonald and Evans publisher.

Horngren. T. Charles (2002), cost accounting A Managerial emphasis, USA, 9th

edition, Printice

Hall International.

Lucey. T. (1996), Costing, London, 5th

edition, ELST publication

Lipsey. G. Richard (2006), Introduction to Positive Economics, London, 6th

edition.

Lossel (2000), Auditing, 7th

edition, Letts educational London.

Morse. J. Wayne (2003), Cost Accounting, Processing, Evaluating, Classifying cost data, 2nd

edition.

Marshall (1998), Principles of Economics, London, 8th

edition, Macmillan.

Owler. L. W and Brown J. W. (2004), Wheldon’s Cost Accounting, London, 6th

edition . Pitman

publisher

Pizzey Allan (1999), Principles of cost accountancy a managerial perspective, India, 5th

edition,

Macmillan.

Pandey. I. M (2005), Financial Management, New Delhi, 7th

edition, Dow Jones Jrwin Chicopee.

Stoner. A. F James etal (2000) Management, India, 6th edition, Prentice Hall.

Saleemi. N. A (2001), Financial Accounting, Nairobi, 2nd

edition, Salami publications.

Van Horne (2002), Fundamentals of Financial Management, London, 7th

edition, Prentice Hall.

37

APPENDIX

MAKERERE UNIVERSITY

QUESTIONNAIRES

Dear respondent,

This questionnaire is intended to facilitate the study on cost control techniques and profitability in

manufacturing firm. (Coca – Cola Uganda).

The research is mainly for academic purposes and will not be used else where other than for the

purpose of the award of a degree of bachelor

For the purpose of being precise and concise some responses are going to be answered as

follows;

Strongly Agree (SA) Agree (A) Not Sure (NS)Disagree (D)

Strongly Disagree (SD) and a few will require filling in.

The accurate of the report will depend greatly on your response.

Thank you in advance.

Name (Optional)……………………………………………………..

Department …………………………………………………………

Sex: Male Female

Level of education:

Post graduate Degree Diploma Certificate

Others (Specify)………………………………..

Age:

18-20 20-30 30-40 40-50 50+

Marital Status:

Single Married Others (Specify)………………………

38

SECTION A: COST CONTROL TECHNIQUES

BUDGETING

QUESTIONS SA A NS D SD

1. The organization prepares budgets

2. Your company spends according to the budget

3. Does your company compare to previous budgets

while preparing budgets

4. Are all departments involved in budget preparations

5. Does your company often experience deviation in the

budgets

6. Are there measures put in place to control budget

deviation

STANDARD COSTING


1. Coca- cola has pre-determined costs that are to be

incurred

2. There is a committee or a person that sets the standard

costs

3. Does your company compare the predetermined costs

with actual costs that are incurred

4. The company has the basis of pre-determining the

costs

5. The company takes collective action whenever there

are deviation in the costs

6. Coca cola always revises the standards whenever they

are no longer effective

BENCHMARKING


1. Coca cola compares its product quality with that of

other companies to improve its products

2. The companies copies innovations of different

departments to improve the quality of its products

3. There is overall improvements of the company

products through benchmarking

39

INVENTORY MANAGEMENT


1. There is inspection of product quality before they enter

the store

2. Stock taking often takes place

3. The company keeps stock records

4. There is verification of documents before stock is

released from the store

5. There is security of stock while in the store

JUST IN TIME


1. Products are produced just in time

2. There is zero inventory in your company

3. There are zero defects during production

4. Production is done in batches

TARGET COSTING


1. The company always targets the price that the

customer is willing to pay

2. The target price always help the company to determine

the target profits

3. The target profits usually help in determining the

target costs of the products

TOTAL QUALITY MANAGEMENT


1. There are standards of quality put in place

2. Quality management is done at all levels of production

3. The quality of inputs determines the quality of the

output

40

SECTION B: PROFITABILITY


1. Cost accounts are maintained

2. Unit prices are predetermined basing on the cost

incurred

3. The pricing of the product depends on prevailing

demand

4. Pricing of the product sometimes depends on prices of

the competitors

5. Your company is making profits

SECTION C: RELATIONSHIP BETWEEN CONTROL TECHNIQUES AND

PROFITABILITY


1. Changes in cost of production affects profits

2. Has control techniques improved profitability

3. Low levels of profits are due to the weaknesses of cost

control techniques

4. Profits can be determined basing on the costs

THANK YOU FOR YOUR COOPERATION

CHAPTER ONE - College of Education and External Studies

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Transcript of CHAPTER ONE - College of Education and External Studies