IMPACT OF COST CONTROL AND COST REDUCTION ON

PROFITABILITY OF MANUFACTURING COMPANY

A Project Submitted to

University of Mumbai for partial completion of the degree of

Masters in Commerce (Accounting and Finance)

Under the Faculty of Commerce

By

NIDHI ARUN PATEL

Under the Guidance of

PROF.ANITA AGARWAL

RSET’s

Ghanshyamdas Saraf College

of Arts and Commerce

Affiliated to University of Mumbai

Reaccredited by NAAC with ‘A’ Grade

S.V. Road, Malad (W)

Mumbai – 400064

MARCH2021
 RSET’s

Ghanshyamdas Saraf College

of Arts and Commerce

Affiliated to University of Mumbai

Reaccredited by NAAC with ‘A’ Grade

S.V. Road, Malad (W)

Mumbai – 400064

CERTIFICATE

This is to certify that Ms. NIDHI ARUN PATEL has worked and duly completed
her/his Project Work for the degree of Bachelor in Commerce (Accounting & Finance)
under the Faculty of Commerce in the subject of Accounting & Finance and her/his
project is entitled, “Impact of Cost Control and Cost Reduction on Profitability of
Manufacturing Company ” ‘ ‘under my supervision.

I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any
University.

It is her/ his own work and facts reported by her/his personal findings and investigations.

___________________________ _____________________
Project Guide Principal
Prof. Anita Agarwal

College
___________________________ Seal
External Examiner
Date:
 DECLARATION

I the undersigned Miss. NIDHI ARUN PATEL _hereby, declare that the work embodied
in this project work titled “Impact of Cost Control and Cost Reduction on
Profitability of Manufacturing Company ”forms my own contribution to the research
work carried out under the guidance of Prof. Anita Agarwal is a result of my own
research work and has not been previously submitted to any other University for any
other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

_________________________
Student
Mr./Ms.

Certified by

_____________________
Project Guide
Prof. Anita Agarwal
 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Dr. Jayant Aptefor providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Course Co-ordinator, Prof. Lipi Mukherjee for her
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.Anita
Agarwal whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
in the completion of the project especially my Parents and Peers who supportedme
throughout my project.
 SUMMARY

The competitive pressures of the world made increasingly companies focus on the cost
management that has always been a basic component of any successful business strategy.
Cost management practice has an effect on the manufacturing firms‘ performance. This
study focuses on examining cost management practices in reducing and controlling of
manufacturing costs GAC Toyota Motor Co., Ltd and Nigeria (PLC).

The secondary data collected from documents and reports of the company. Data
analyzed with descriptive statistics such as frequencies, percentages, mean and standard
deviation

The data presented in tables and charts. The study found out that the importance of top
management support, employee involvement and responsibility accounting in reducing
and controlling manufacturing costs.

It also discovered that manufacturing companies can reduce costs and maintain quality
products and using various techniques by the use of effective cost control and reduction
tools and techniques such as budgetary control, standard costing, quality control and
target costing.

The study recommends that manufacturing companies should how save cost and make
use for its profit the importance of top management support, employees‘ involvement
and responsibility accounting in controlling and reducing manufacturing costs. It also
recommends that manufacturing companies should implement cost control and reduction
tools and techniques in their cost control schemes. our findings suggest that
standardization of materials can help companies to directly reduce material costs. The
most interesting findings from our study, however, are that joint ventures and agents
cannot help companies reduce entry costs. Additionally, the logistics management and
supply chain management play vital roles in cost reduction in automobile companies via
professional outsourcing of logistics and effective information systems.
Chapter
Title of the Chapter Page No.
No.

Introduction and Research Methodology

1
Introduction 1-22
Research Methodology
23-25

2 Literature Review 26-28

Company Profile (company selected by student)

3 Gac Toyota Motor Co,Ltd 29-64

Nigeria breweries

4 Data Analysis and Interpretation 65-79

5 Conclusion and Suggestions 79-85

Bibliography

Appendix (Questionnaire)
CHAPTER 1- INTRODUCTION AND RESEARCH METHODOLOGY

INTRODUCTION
What are Manufacturing Costs?

Manufacturing costs are the costs incurred during the production of a product. These
costs include the costs of direct material, direct labor, and manufacturing overhead. The
costs are typically presented in the income statement as separate line items. An entity
incurs these costs during the production process.

Direct material is the materials used in the construction of a product. Direct labor is that
portion of the labor cost of the production process that is assigned to a unit of production.
Manufacturing overhead costs are applied to units of production based on a variety of
possible allocation systems, such as by direct labor hours or machine hours incurred.
Examples of the types of costs that can be included in manufacturing overhead include:

 Salaries and wages for quality assurance, industrial engineering, materials

handling, factory management, and equipment maintenance personnel

 Equipment repair parts and supplies

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  Factory utilities

 Depreciation on factory assets

 Factory-related insurance and property taxes

When accounting for inventory, include all manufacturing costs in the costs of work-
in-process and finished goods inventory.

Manufacturing costs, however, do eventually become manufacturing expenses Material

used, direct labor incurred, and manufacturing overhead are first recorded

Classification of Manufacturing Costs and Expenses in inventory accounts (work in

process and finished goods) and then become an expense when finished goods are sold.
In a manufacturing business, only the cost of goods sold account can properly be called a
manufacturing expense.

Prior to the sale of finished goods, all manufacturing expenditures remain as unexpired
costs. In order to understand the transformation of manufacturing costs into
manufacturing expenses, you should fully understand the flow of cost as taught in cost
accounting.

The term, variable cost, then primarily refers to the manufacturing costs that are reflected
in the inventory accounts: materials, work in process, and finished goods. The term,
variable expenses, refers to cost of goods sold and to other variable nonmanufacturing
expenses such as sales people‘s commissions.

The two terms, variable expenses and variable costs, are sometimes used
interchangeably. Some writers use the term variable costs to include variable expenses.
The technical difference is ignored because the theory underlying the use of variable
expenses is the same as for variable costs. There is one instance in which manufacturing
costs and manufacturing expenses (cost of goods sold) are the same in amount.

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When sales equal production, that is, all units manufactured are sold, then manufacturing
costs (materials used, direct labor incurred, and manufacturing overhead incurred) and
the manufacturing expense (cost of goods sold) are equal. Under these conditions, all
manufacturing costs including fixed manufacturing overhead incurred will be included in
cost of goods sold.

In terms of financial statements, manufacturing costs appear on the cost of goods

manufactured statement while manufacturing expenses are shown on the income
statement. However, the amount of manufacturing costs is not necessarily reported on the
income statement in the period incurred. Some of the current period manufacturing cost
may still reside in finished goods inventory until the inventory is sold.

Manufacturing and Non-Manufacturing Costs The distinction between manufacturing and

nonmanufacturing costs is important because this dual classification is reflected in
different types of financial statements for the manufacturing business: the income
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statement and the cost of goods manu-factured statement. The cost of goods
manufactured statement shows all the current period manufacturing costs while the
income statement shows all the current nonmanufacturing expenses.

In order to understand the direct relationship of the income statement and the cost of
goods manufactured statement, it is necessary to under- stand the distinction between
manufacturing and nonmanufacturing costs. Manufacturing costs may be simply defined
as materials used, direct labor incurred, and manufacturing overhead incurred. These are
the costs that are found on the cost of goods manufactured statement.

Nonmanufacturing costs (techni- cally, expenses) are those expenses commonly called
selling and administrative. These are the expenditures incurred in the current period
directly for the benefit of generating revenue. Non manufacturing expenses should not be
included in the cost of inventory. The term is somewhat misleading because the ―cost‖
part of the term implies unexpired costs when it fact it has reference to expenses. Since
―non manu- facturing costs‖ are, in fact, expired costs (expenses), then technically a
better term would be ―non manufacturing expenses.‖

After some costs have been classified as manufacturing, they are normally further
classified as direct and indirect. Materials used in the manufacturing process are either
used directly or indirectly. Direct material is material that becomes part of the finished
product and, therefore, significantly adds to the weight or size of the product. If the final
product, for example, is a wooden chair, then the wood used to make the legs, seat, and
back is a direct use of material.

Materials such as glue and screws, usually not significant in amount, are often regarded
as an indirect use. Also material issued but not becoming a part of the final product and
used for manufacturing objects such as saw horses or shelves to store paint or other
incidental materials would be regarded as an indirect use of material.

In a similar manner, factory labor is normally classified as either direct or indirect.

Consequently, two types of labor are recognized: direct factory labor and indirect factory

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labor. Direct factory labor is the cost of labor incurred while work is done on the product
itself. Normally, in one way or another, direct labor affects the physical appearance of the
product. Some factory workers do not actually work on the product itself but provide
services necessary to the over-all manufacturing process.

Janitorial services, repair and maintenance service, supervision of direct workers, and
computer support are examples of labor incurred that would be regarded as indirect. The
significance of classifying material and labor as an indirect cost is this: indirect material
and indirect factory labor are recorded as manufacturing overhead and, therefore,
becomes a part of the cost of the final product through the use of overhead rates.

HOW TO REDUCE MANUFACTURING COSTS BEST WAYS

The best way to reduce manufacturing costs is to target the three areas in which costs
generally fall: direct labour, materials, and manufacturing overheads. In this article we‘ll
look at each of those areas in detail and suggest ways in which business owners and

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managers can reduce manufacturing costs – without lowering their output or overall
quality – thereby boosting their overall manufacturing productivity.

Understanding manufacturing costs

Manufacturing costs are the sum of costs of all resources used in the process of
manufacturing a product. They include direct labour costs, material costs, and
manufacturing overheads. Let‘s take a look at each type below – and how to reduce
manufacturing costs by addressing each area.

How to reduce manufacturing costs: direct labour

Direct labour costs are largely comprised of wage spend that can be specifically and consistently
assigned to the manufacturing process. Aside from regular wages, it can also include:

 After-hours pay
 Time in lieu
 Health insurance
 Profit share contributions
 Matching payments to retirement schemes
 Leave entitlements
 Travel expenses
 Redundancy payouts

How to reduce direct labour costs

Review staff wages and hours
It may be time to review staff wages — do you need all staff currently on the books?
Can you retrain any staff to a more value-adding role? A lot of money goes into
hiring and keeping staff so make sure it‘s money well spent.
Generally, staff income goes up over time. Before confirming any pay raises, ensure
you know how much other companies may be paying for similar roles, and delay any

6
pay raises until the right time where appropriate. Of course, it‘s important to ensure
you communicate clearly and transparently with any affected staff and let them know
if there are things they can do, such as up-skilling.
A related cost that comes with staff is the rate of staff turnover. If you have high
levels of staff turnover, this can incur huge costs to the business, due to the constant
need to go through the recruitment process.
Employing new staff means advertising, which is expensive, and if necessary, paying
recruitment agencies to help with the process.
Employing new staff means advertising, which is expensive, and if necessary, paying
recruitment agencies to help with the process.

Work hard on reducing staff turnover to avoid this, by identifying the things that are
making people leave. Consult with your employees to get their perspective – for
example, is it the workplace culture? Is it the pay? Are specific roles becoming a
‗revolving door‘ and if so, why? Asking these questions is key to fixing issues with
staff turnover.

On a related note, you may also want to consider whether all staff need to be full -
time, or if some roles can be reduced to part-time. This will also reduce costs and
ensure cash can be used elsewhere.

Avoid over-scheduling staff

One mistake many manufacturing business owners make is scheduling staff for shifts
unnecessarily. Often managers will make a ‗best guess‘ on staff numbers needed
over a given period. This method can be hit or miss, and often-times results in over-
scheduling. This, of course, increases costs as employers must pay wages for staff
who aren‘t needed.

You can avoid this by using scheduling software to automate the process based on
demand in previous weeks accurately.

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Optimize processes with the right tools
Many small businesses manage their staff, resources and time the old way — with a
pen and paper, and perhaps the odd Excel sheet. While this can be manageable while
a business is in its infancy, it is not sustainable with any form of growth.

Instead, we recommend using SaaS software for inventory management, accounting,

payroll, point of sale and more. The right tools will help you reduce unnecessary
costs that come with overstaffing issues, excessive stock orders and more.

How to reduce manufacturing costs: material costs

Material costs are the costs associated with direct materials which can be easily tied
to production. Material costs range from everything from raw materials, fuel and
energy costs to packaging and spare parts.

These typically account for a large proportion of total costs, making it a major area
of concern for many manufacturing businesses.

How can manufacturers reduce material costs?

Reducing manufacturing costs doesn‘t just come down to staff expenditure, and
businesses shouldn‘t limit themselves to this approach alone. Here are four strategies to
help you reduce materials costs.

Negotiate with suppliers

Negotiating prices isn‘t a skill that necessarily comes naturally. We recommend business
owners think carefully about how they approach suppliers and ensure they‘re being
strategic when it comes to agreeing on costs.

The first step in this process is to build genuine relationships with your suppliers. Once
you‘ve built a rapport, negotiating money is less uncomfortable.

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Buy materials only as you need them

Many small business owners make the mistake of ordering excessive inventory.

Excess stock reduces cash flow and your capacity to rely on back up funds for the
company – so business managers need to be thorough when it comes to ordering stock.
The best practice is to use inventory software which can accurately predict future demand
based on previous sales trends, rather than simply hazarding a guess. Alternatively,
consider whether a Just-In-TIme approach – where you order stock responsively as you
make sales – is appropriate for your business.

Substitute expensive materials for more affordable ones

Don‘t make the mistake of relying on the same raw materials for your products
throughout the business‘ life cycle. As a business grows, managers need to consider
alternative raw materials which produce the same or similar end product, but which are
more economically sustainable. Consider, for instance, ways you may be able to recycle
materials into new products or use substitute materials which are less expensive. These
small changes can drastically help you reduce manufacturing costs.

Review and redesign products or processes

Sometimes products and manufacturing processes can become inefficient. It‘s worth
regularly reviewing your products and processes to assess their value, and how much it‘s
costing you. Then, you can redesign the product or process to maximise efficiency.

For example, a coffee roaster finds that she‘s spending more on materials than the
industry benchmark and reviews the products. Among her products, she finds that one of
them uses more expensive packaging materials than the others. She assesses the
packaging material and finds that, in comparison to the other products, the function is the
same and it doesn‘t add any additional value. Yet, it is adding 15% more to the total
material costs. She swaps this expensive packaging material for a standardised packaging

9
material that she uses across all her products and saves more than she expected as she
was able to buy the packaging materials in bulk.

How to reduce manufacturing costs: manufacturing overhead

Overhead costs include maintenance of the manufacturing site, electricity, gas, supplies
for staff like uniforms, printing, vehicles and other related costs.

How can manufacturers reduce manufacturing costs in overheads?

Reducing manufacturing overhead can be key to reducing manufacturing costs overall,

and can help free up cash for other important areas of the business.

Review rent

Rent is a cost that many new business owners tend to neglect — it‘s a necessary
expenditure, so it may seem like there‘s no way to reduce costs in this area. However, all
manufacturing businesses should be regularly reviewing their rent costs, whether they
have multiple warehouses and sites, or only one or two.

Consider whether the rent you‘re paying for these sites is worth it. That is, are you
making enough profit from your products in comparison with your rental expenditure? If
not, you may need to consider renting a smaller site or reducing the number of sites
you‘re renting.

Consider how you’re spending the budget for maintenance

In a similar way, maintenance costs are very often neglected by business owners as
they‘re seen as a ―necessary evil‖. , Managers should regularly review maintenance costs
to ensure they‘re not excessive or unnecessary.

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Review miscellaneous office or warehouse costs

The final costs to consider in manufacturing businesses are things such as office supplies,
staff supplies, fuel, staff vehicles, uniforms, security keys, cleaning services for staff
rooms and other miscellaneous costs. As with all the costs discussed above, small things
like this add up, and there may be room for improvement. Regularly review these smaller
costs and ensure that you‘re not overspending on unnecessary things, or paying more than
you need to. For example, you could make a switch to a different brand of office
stationery or coffee. It wouldn‘t be too much of a change to daily life, but it can
significantly impact your total costs.

Cost Reduction Analysis

Cost reduction analysis is the process used by companies to reduce their costs and
increase their profits. The strategies of different companies vary according to the
products or services that they offer.

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Every decision made in the product development process affects the costs. It is a common
practice that companies launch a new product without focusing on how much will be the
value. But when competition increases and prices of products or services become a major
differentiator in the market, the price suddenly becomes very important.

Cost control regulates the action to keep the cost elements within the set limits. Cost
reduction, on the other hand, refers to the actual permanent reduction in the unit price. It
will be useful to know the difference between cost control and cost reduction.

Cost Control
Cost control is the process that is focused on rationalizing the total value by employing
competitive analysis. This practice works to maintain the actual price according to the
established policy. It should make sure that the operational cost must not go over the
pre-determined cost.

Cost control involves a series of functions, starting from the preparation of the budget
concerning the operation, evaluation of the actual performance, computation of the
variances between the actual costs and the budgeted value, and finding the reasons for the
same. The last function is implementing the necessary actions to correct the
discrepancies.

The major techniques in cost control are standard costing and budgetary control. Cost
control is a continuous process as it helps in the analysis of the causes for variances
which control wastage of materials, embezzlements, and so on.

Cost reduction analysis as a process aims to reduce the unit cost of product or service the
company offers without prejudice to its quality through the use of new and improved
methods and techniques. Cost reduction ascertains other ways of reducing the cost of a
unit. It aims to realize savings in the per-unit cost of the product while maximizing
profits for the organization.

12
Cost reductions aim to lower the unnecessary expenses that may occur during the
production, storage, sales, and distribution of the product.

The following are the major elements of identifying cost reduction:

 Savings in the product‘s per-unit cost
 Savings are non-volatile
 No compromise with the product quality
The tools for cost reduction analysis are:
 Research on sales and quality operation opportunities
 Improving the design of the product
 Evaluation of job performance, including the best merit rating
 Reduction of variety

Five Steps in Cost Reduction

Many cost optimization programs failed in delivery or acceptance. There are some
products that regardless of how the costs are cut, the returns are still not viable, either
because customers do not see their value or there is always another company that can
offer them cheaper or free opportunities. The main focus of cost reduction analysis is on
value potential instead of cost or volume. There is also the point where the winning costs
have been accomplished, leaving plenty of far-reaching choices on the horizon. The wins
may mean withdrawing from non-viable markets, elimination of certain processes
through automation, and a need for a significant shift in the business model. Making the
correct choices and ensuring business success needs a rethinking of strategy and to see if
they will align. The five steps focus on optimization instead of merely cutting value to
help and ensure that the business is competitively relevant while maximizing the
potential.
1. Start with strategy
The cost reduction analysis should start with a clear picture of the strategy to make sure
that there is a consistent understanding of the organization. A cost reduction analysis
cannot be carried out if the business strategy is not fully understood because it may not be

13
clearly defined. The entire organization should be on the same page with regards to its
business strategy, otherwise, any attempt by one unit to institute cost reduction will not
be understood and will not gain any help and support from the other units.

2. Align costs to strategy

The cost reduction analysis should look across the whole organization, differentiating the
critical good costs from the non-essential bad costs. If the strategically-critical good costs
are necessary to maintain the high quality of the products or the services, they should not
be touched. It should be the non-essential bad costs that should be reviewed for possible
reduction or, when necessary, elimination.

3. Aim high
Aim high when working on new ways to radically optimize the cost base. The company
can be bold, creative, and brave in the use of innovation and technology to help you find
ways of reducing value that will make the product or service competitive while at the
same time maintaining its high quality.

4. Set direction and show leadership

The manager who is tasked to do the cost reduction analysis must deliver cost
optimization as a strategic, business transformation program. Cost reduction should not
be a short-term thing that will be abandoned when working with another product. The
cost reduction program should be a company-wide endeavor that is aimed to transform
the way business is conducted.

5. Create a culture of cost optimization

Ensure that cost optimization will be embedded as a culture of ownership and incentivize
continuous improvement even if it means for free. The need to search for ways to reduce
costs must be part of the company culture that should trickle down from the top
management to the workers on the production floor. Everyone should be looking for
ways to cut costs while ensuring that the high quality is maintained all the time. It will
make the company‘s products popular with consumers as they are highly competitive at

14
the same time. The main priority in making cost reduction is the targeting of resources in
areas where they earn the best return, instead of simply cutting the value in itself. The
start point is the differentiation of the capabilities required to spur profitable growth from
low-yielding processes and inefficient techniques. Good costs are capabilities that will
differentiate your business, move it closer to the customer base, and allow it to develop
high-value propositions. Identifying and focusing on things that matter to customers in
the current market will ensure the success of your cost reduction strategy.

Other Services
 01. Cost Optimization
 02. Cost Segregation Study
 03. Office Supplies Expense
 04. Healthcare
 05. Credit Card Processing
 06. Revenue Enhancement
 07. Same Day ACH
 08. Zero Cost Credit Card
 09. Workers Overpayment
 10. Business Health Insurance

Cost reduction is a planned positive approach to reduce expenditure. It is a corrective

function by continuous process of analysis of costs, functions, etc. for further economy in
application of factors of production.

―Cost reduction is to be understood as the achievement of real and permanent reduction

in the unit cost of goods manufactured or services rendered without impairing their
suitability for the use intended or diminution in the quality of the product.‖

Advantages of Cost Reduction:

Cost reduction causes a definite increase in margins. The saving in cost may also be
passed to consumers in the form of lower prices or more quantity in the same price. This

15
will create more demand for the products, economies of largescale production, more
employment through industrialization and all-round improvement in the standard of
living. Government may also stand to gain by way of higher tax revenues.

Cost reduction is essential of a product has to withstand its global market. Brand loyalty
is fading away fast. Nowadays consumers have become price and quality conscious.
Hence cost reduction is the key for global competitiveness.

Cost reduction is possible by identifying and removing wasteful, unwarranted and

unnecessary elements from the design and manufacturing techniques. It results in the
maximization of profit, as the overall cost of production is reduced.

Cost Reduction results in the increase in savings of the company, example increased
profit margins. The company may pass such savings to the customers as the decrease in
the product prices or more quantity in the given price. The decrease in the overall pricing
will lead to the increase in demand for the product.

However, while implementing cost reduction techniques, one must keep in mind that the
quality of the product or service should not be sacrificed.

There are many advantages of cost reduction. Some of these are:

a. Cost reduction increases profit. It provides a basis for more dividends to the
shareholders, more bonuses to the staff and more retention of profit for expansion of the
business which will create more employment and overall industrial prospects.

b. Cost reduction will provide more money for labour welfare schemes and thus improve
men- management relationship.

c. Cost reduction will help in making goods available to the consumers at cheaper rates.
This will create more demand for the products, economies of large scale production,

16
more employment through industrialisation and all-round improvement in the standard of
living.

d. Cost reductions will be helpful in meeting competition effectively.

e. Higher profit will provide more revenue to the government by way of taxation.

f. As a result of reduction in cost, export price may be lowered which may increase total
exports.

g. Cost reduction is obtained by increasing productivity. Therefore, a developing country,

like India, which suffers from shortage of resources, can develop faster if it makes the
best use of resources by increasing productivity.

MEANING OF COST CONTROL

Cost control is defined and understood as the process of regulating the costs of operating
an undertaking. The process of regulation is guided by cost accounting. Further, cost
control needs executive action. It does not come about automatically.

17
Cost control is achieved by fixing standards of performance, collecting actual cost data
for each area of responsibility, comparing actual data with standards and forwarding
prompt report to top management highlighting the deviations from standards from
immediate corrective action. Thus, cost control compels actual costs to conform to
planned costs.

Modern management is becoming increasingly cost-conscious and is constantly in search

of new ways of controlling costs and eliminating wastages. One of the basic objectives of
cost accounting is to achieve cost control. It is not enough if costs are worked out and
presented regularly to the management. The effectiveness of cost accounting is judged
primarily from the extent to which it has been able to bring about a control over the
manufacturing and other expenses.

In cost control, the first step is to set up the target to be achieved, i.e., the goal or
objective to be attained. The cost control system guides the organization to reach that
goal. For this purpose, budgets or standards are used. These budgets or standards provide
the yardstick against which actual costs and performances may be compared.

If at any stage, it is noticed that the expenses are showing a trend away from the goal,
resulting thereby in a variation from the target, the cost control systems help to regulate
this trend and to eliminate the variations. This guidance and regulation are by executive
action, i.e., through an action taken by the executive who is responsible for the incurring
of the expenditure.

It should be clearly understood that a cost accountant by himself does not control the
expenses. He merely assists in the control of expenses since an expenditure can be
controlled only by the person who incurs the expenditure. The cost accountant brings to

18
the notice of the executive concerned, the exact point on which an action is required of
him for regulating the expenses.

Thus, cost control is the guidance and regulation through an executive action and this
executive action is exercised in respect of all the expenses incurred in operating an
undertaking. Cost control comprises all procedures and measures by which the cost of
carrying out an activity is kept under check and aims at ensuring that costs do not go
beyond a certain level.

―Cost control‖ is operated through setting standards of targets and comparing actual
performance therewith, with a view to identify the deviations from standard norms and
taking corrective actions in order to ensure that future performance conforms to standard
norms. In other words, it can be explained that it is a scientific management technique to
control and reduce the costs of doing business.

It is more of an activity than a theory. Every industry and company have its own
standards to control costs. Cost control is concerned with the ways and means of keeping
the costs at a lower level, without affecting efficiency and effectiveness.

Cost control is achieved by fixing standards of performance, collecting actual cost data
for each area of responsibility, comparing actual data with standards and forwarding
prompt report to top management highlighting the deviations from standards from
immediate corrective action. Thus, cost control compels actual costs to conform to
planned costs.

TECHNIQUES FOR COST CONTROL IN MANUFACTURING COMPANIES

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Understanding Costs

Analyze your company's performance, and you will find that your business costs fall into
three categories: materials and labor (also called cost of goods sold), and overhead. Each
of these categories has its own opportunity for cost control, and the impact of changes in
one area must be considered on the other two. Reducing your sales force may save costs
in overhead, for example, though if that reduces product sales, then your material and
labor levels are thrown out of balance.

Labor Savings

Direct labor is frequently the single greatest expense in the manufacturing sector. In some
regards, it is the most difficult expense to change, because the consequences of change
affect people, and their response to change may be unpredictable. Analyze production
regularly for redundant tasks, and adjust your work force accordingly, but never lose
sight of the motivational changes that may occur coincidentally.
Purchasing Savings
Raw materials provide a variety of ways to reduce and control costs. Watch your
suppliers and search for alternate sources for the same quality stock at better prices. Keep
annual contract terms with suppliers to allow for changes in market conditions, unless
you have a very compelling offer over several years. Investigate payment terms with your
suppliers to match the rate of inventory turnover to reduce your working capital needs,
reducing costs on money you may borrow.

Inventory Management
Consider the time raw material sits waiting for use. Warehouse space can be freed or
eliminated through just-in-time delivery practices, where stock arrives from the supplier
and moves directly to the plant floor. Analyze your situation for similar changes. For
example, if you have warehousing space you can't divest, try negotiating just-in-time
trading with a supplier. In this case, you buy the supplier's inventory when it comes off

20
your shelf, not when it arrives at your plant. Both these strategies reduce the time your
operating capital is tied up in raw stock.

Take It Off the Top

Overhead expenses are often described as "the cost of doing business" and may be
perceived as static. However, a dollar saved on overhead goes straight to the bottom line.
Outsource payroll or marketing functions such as direct mail. Routinely review the bills
for things such as office supplies, office and cell phones and cleaning services, and be
aggressive about finding better deals.

TECHNIQUES FOR COST REDUCTION IN MANUFACTURING COMPANIES

Reduce overhead manufacturing costs with build-to-order and mass-customized

inventory

Several key components to cutting overhead costs in manufacturing is to produce

standard products that can be built to-order without forecasts or inventory, and produce
special products through mass-customization on-demand. In both approaches, once a
confirmed order for products is received, products are built.

The results can be staggering. Inventory Carrying Costs can be eliminated (the standard
―rule of thumb‖ for inventory carrying cost is 25% of the inventory value on hand), and
procurement costs can be reduced with automatic, on-demand resupply. In theory, better
responsiveness leads to more sales. Although not a manufacturing cost cutting measure,
certainly a positive outcome.

21
Standardize parts to reduce manufacturing costs

In Build-to-Order and Mass Customization manufacturing cost reduction is realized at the

parts and raw materials level. Standardization supports the fundamental concept of build-
to-order and mass customization in that all parts must be available at all points of use
which eliminates the setup to find, load, or kit parts.

Standardization reduces the number of parts types and makes it easier for parts to be
pulled into assembly. Fewer types of parts ordered in larger quantities will reduce part
and material overhead cost. Floor space reduction, overhead cost cuts, and time saved in
setup, logistics and supply chain management are additional benefits. Other types of
standardization which can also affect cost include tools, features, raw materials, and
processes.

Evaluate the cost/benefit of quality

Quality cost reduction is an important step in reducing manufacturing costs. Without

continual assessment of and improvement upon the manufacturing process, the Cost of
Quality can be 15% to 40% of total revenue. Quality costs reductions produce an increase
in profits.

The first step to eliminating quality costs involves designing in quality. This method
assures high quality and reliability by design of the product, preventing costly errors,
defects, reworks and overhead demands. Designing in quality requires a significant
amount of planning and preparation. Simplifying designs, taking past quality problems
into consideration, automating processes and thoroughly documenting every step of the
design are all steps to reduce quality cost.

22
 RESEARCH AND METHOLODOLODY

A research methodology introduced the general plan of how the research will go about
doing the research survey procedure. This study exploratory study and survey method.
The use of multiple methods allowed the researches to gather different kind of data,
which provides different kind of data, which provides different viewpoints to address
different research objectives.

OBJECTIVES OF THE STUDY:

1. To understand the objective of cost control and cost reduction.

2. To understand the requirements needed to ensure an effective cost control system.
3. To examine cost control techniques that are involved in the cost control process.
4. Appraise various cost control techniques and its impact on manufacturing firm.

TYPE OF RESEARCH:

This study is Descriptive in nature. It helps in breaking vague problem into smaller and
precise problem and emphasizes in discovering of new ideas and insights.

RESEARCH DESIGN:

Research design constitutes the blueprint for the collection, measurement and analysis of
data. The research design is Descriptive in nature.

RESEARCH INSTRUMENT: The instrument used for gathering data was

Questionnaire. To get further insight in research internet was used.

23
METHOD OF SAMPLING:

Due to time and research constraints. I have used Simple Random sampling method.

SAMPLE SIZE:

It indicates the number of people to be surveyed. Though large sample give more reliable
results than small samples but due to constraint of time, the simple size was restricted to
100 respondents.

SAMPLING UNIT:

It defines the target population that will be sampled. It answers who is to be surveyed. In
this study, the sampling unit is of age group of 20 -60 years.

TOOLS AND TECHNIQUES AND ANALYSIS:

The data so collected will be analyzed through the application of statistical technique,
such as Bar Graphs and Pie Charts.

SOURCE OF DATA:

 PRIMARY DATA:
Questionnaire was used to collect primary data from respondents. Questionnaire
was used to collect primary data from respondents. The questionnaire was
structured type and contained question related to different dimensions of
manufacturing sector. An attempt was made to see the impact of covid on
manufacturing sector. The questions included in the questionnaire were
Dichotomous and offering multiple choices.

 SECONDARY DATA:

The study data is collected from different sites from internet.

24
NEED OF THE STUDY:

1. To find out if cost reduction and cost control scheme are applied in the
manufacturing sector.

2. To study if the cost reduction and cost reduction technique has a significant effect
on the profitability of the manufacturing sector.

3. To offer suggestions on specific cost reduction and cost control techniques for
manufacturing company.

SCOPE OF THE STUDY:

1. To study benefit of manufacturing sector especially Nigeria Breweries Plc to improve

upon their cost reduction and cost control program as a measure of reducing cost of
production.

2. To study cost reduction and cost control does have a significant and positive impact on
the profitability and growth of manufacturing company.

3. To study significant relationship between effective cost reduction and cost control
technique and the reduction of unit cost and total cost of production in manufacturing
company.

LIMITATION OF THE STUDY:

1. The study findings are only from the manufacturing firm perspective.

2 The study show how standard cost are expensive to set up.

3 The Cost accounting system cannot be adopted by small business concerns

25
 CHAPTER 2- LITERATURE REVIEW

 Marks & Spencer (1930), the British retail chain, designed the first such system in
the 1930s. Marks & Spencer designs and tests the goods (whether textiles or
foods) it has decided to sell. It designates one manufacturer to make each product
under contract. It works with the manufacturer to produce the right merchandise
with the right quality at the right price. Finally, it organizes just-in-time delivery
of the finished products to its stores.

 Becker (1996), Changes in business environment in last century had the

significant impact on the structure of the company costs. In the first half of 20th
century, manufacturing-related costs (materials, salaries of employees and
replacement of the plant) constituted well over 90% of total costs. Majority of
those manufacturing-related costs had the direct character. Portion of the indirect
– overhead costs rarely exceeded the 20% of total company costs.

 Reeve and Philpot (1988), supported that statistical process control is an efficient
way in cost control and cost reduction techniques. He said that, defining the
process from the point of view of the financial manager is the first step in SPC.
More so, over time, the characteristics of the process are measured and observed.
Control charting is the process of studying the difference from the mean. This
identifies correctly if the process has come up against any special difference that
needs better attention. With the use of SPC, firms are able to significantly
improve organizational effectiveness, product quality, and process efficiency.

 Wing (2000), stated that there are two major fundamental financial management
tools which include budgets and variance analyses. Nevertheless, the reports of
variance are not necessarily useful for a manager. When performing variance
analyses, the main difficulty is that there is need for cost to be known as either as
variable or fixed cost. Practically, large numbers of costs do not perform in this
manner. It leads to constraints on reports and inadequate management behaviour.

26
 The author opined that financial managers must develop models that will reflect
the way cost actually perform, and reporting the difference through improved cost
models. When a system is based on an inadequate model, this can be used or
discarded. But when it is used, it leads to inadequate decisions by the
management.

 Cokins (2002), stated that companies needs to be equipped with accurate cost
modelling procedure so as to manage their costs and ascertain an acceptable profit
margin. However, as competition grows larger, the origination of new products
must outdo product becoming old or out fashioned. Production of a product that
has been produced can be accomplished through reduction of unfavourable cost
differences from the product‘s standard cost and applying advancement process
and managing the cost.

 Anthony, et al (2005), regards cost control as cost management or cost

containment and defined it as a broadset of cost accounting methods and
management techniques with the goal of improving business cost efficiency, by
reducing costs or at least restricting their rate of growth. Businesses use cost
control methods to monitor, evaluate and ultimately enhance the efficiency of
specific areas, such as departments, divisions or product lines within their
operations.

 (Drury,2009). Cost and management accounting system generate information to

meet different requirement such as profit measurement and inventory valuation,
decision making, performance measurement and controlling the behaviour of
people. Among the various cost classification methods, behaviour-based cost
classification is essential for decision making and it describes how costs and
revenues vary with different levels of activity.

27
 (Hansen, 2009), ability of analysing company costs becomes one of the most
important premises of the effective cost management and understanding cost
behaviour is an essential element of cost and management accounting. Knowing
how costs change as activity output changes is an essential part of planning,
controlling, and decision making.

 (Heim and Peng, 2010), Over the last few decades manufacturing companies have
adopted advanced technology for a variety of purposes including automation,
enterprise resource planning, supply chain management, and efficiency
improvements in manufacturing industrie. Today, the use of technology in
manufacturing companies is at various levels. This results in various degrees of
use of technology (or capital-intensity) in a firm.

 (Barbole, Nalwade & Parakh, 2013), In manufacturing unit, where its main cost
element is the material cost. Manufacturing companies are preferring techniques
like value engineering, quality control, budgetary control, for the purpose of cost
reduction. This technique fulfills the objective of company i.e. ―Low Cost
Manufacturer‖.

 (Bilan, 2013), Cost management is one of the most important issue of company
performance and company financial management. Also the issue of the costing
systems, methods and techniques is one of the important features of cost
management and management accounting. We can observe a continuously
growing importance of cost management systems quality that is caused by
dramatic changes in business environment. Ecological, economical, social and
environmental problems, as well as challenges connected with developing of the
consumers, make the companies concerned with existing level and quality of
relationship between them and the society, their employees and their consumers.
On the one hand new challenges and expectations of the consumers force the
companies to develop and introduce policies which foresee their strategy as for
dealing with social, ecological and other problems.

28
 CHAPTER 3 COMPANY PROFILE

GAC Toyota Motor Co., Ltd.

GAC Toyota Motor Co., Ltd (GAC Toyota) was established in 2004, the shares of GAC
Group Co., Ltd and Toyota Motor Corporation at 50:50 joint investment construction and
operation of enterprises, there is a joint venture period of 30 years, and registered capital
of $ 362,66 million. GAC Toyota Motor Co., Ltd is located in the Nansha District of
Guangzhou covering an area of 1.87 million square meters. The main auto products of
GAC Toyota are Camry, Highlander, EZ and Yaris, with the annual production capacity
of over 360,000.

Labor & Material

GAC Toyota pays more attention to reducing material and labor. Stamping is one of the
important steps of the production process, because 60% - 70% parts in the automobile are
produced by the stamping process.

GAC Toyota's stamping plant has introduced the most advanced stamping line around
world and the world advanced stamping line has increased labor productivity by more
than 20% to reduce costs directly. In the process of interview with the representative
from GAC Toyota, the interviewee agreed that materials and labor can help a company to
reduce costs directly, and the interviewee provided an example about reduction costs in
material.

29
GAC Toyota adopted labor localization strategy, and most of the labor come from
Guangdong province. According to the interview with workers from the front-line, the
average salary of ordinary workers who are working in the front-line is $ 4,381 per year.
However, the salary of the same position in U.S Toyota is $41,000 per year. Compared
with labor costs in the U.S, the costs of labor in GAC Toyota is almost one-ten to U.S
Toyota through comparing the salaries between GAC Toyota and U.S Toyota.

Joint venture

GAC Toyota is a joint venture with Toyota Group, GAC Group (China) and Toyota
Group (Japan) holds 50% shares each. According to the interview with the top
management of GAC Toyota, he does not consider that entry strategies can help a
company to reduce costs directly.

The third-party logisticscompany

In October, 2007, Tong Fang Global (Tianjin) Logistics (TFGL) was established to be a
partner with GAC Toyota in China.

Toyota cooperates with TFGL in the field of supply chain management and outbound
logistics, including raw materials, automobile and components. It is not easy for TFGL to
cooperate with GAC Toyota since there are quite rigorous requirements, which have to be
followed.

The first rule, the most important one for GAC Toyota is to avoid the factor of logistics
that influences a company‘s manufacture and sales.

Having a long-term cooperation and cultivating TFGL sustainably.

Mastering the demand of logistics, package style, distribution of supplier and

approximate logistic cost.

30
Information system

There is an old saying in Toyota Motor that ―in order to reach the ambitions of
responsibility for employee, society and product and obtain the target of avoiding
wastage, a reasonable manufacturing method is pursued via Just-in-time and automation,
based on improvements continually‖ which is to improve and change any unnecessary
process in the manufacture.

Namely, this rule eliminates the unnecessary process and waste drastically, GAC Toyota
Motor can benefit from the cost reduction and cost reduction. GAC Toyota Motor Co.,
Ltd adopted the classic lean programming of the Toyota group, which is the latest factory
worldwide and can be represented as the highest-level factory of the Toyota Group.

Additionally, GAC Toyota is one of the most successful implementation companies in

the lean programming in China. The successful implementation of lean programming in
the manufacturing process not only reduces the inventory costs of GAC Toyota, but also
improves the production efficiency of GAC Toyota.

Supply chain management

GAC Toyota asks the original suppliers to engage in joint management, which is a
particular trait for GAC Toyota and is the base rock of cost reduction for GAC Toyota.
Xiancheng introduced that all their suppliers are chosen by bids, which is quite vital for
GAC Toyota.

GAC Toyota has to balance the quality and price from the different suppliers. In addition,
GAC Toyota will not make a long-term cooperation with suppliers, which has a positive
effect on choosing a better supplier. Furthermore, GAC Toyota will make some
adjustments and improvement regularly via historical experience.

31
Toyota asks TFGL to have a good blueprint for future and current phenomenon since the
previous blueprint plays a vital role in cost reduction of logistics, especially a new route
or change of logistic strategies.

Xiancheng introduced three examples. One is that TFGL will change or improve the
transportation routes of raw materials and products so as to get the best route to arrive at
the destination in time.

Second is that TFGL utilizes water transportation to help GAC Toyota reduce costs,
since the fee for road transportation is 30 per cent more expensive than water
transportation. Currently, 60 per cent of carryings is water transportation. According to
the interview, more than 100 million Chinese Yuan was saved in the field of logistics.

Carryings and cost of logistic Occupation Road transportation Water transportation

Carryings 40% 60% Cost 43.48% 56.52%

The third one is that the distance between manufacturer and items for export and the
coastline is approximately 50 kilometers. The short distance has a positive effect on
inventory cost. There is no warehouse in the logistics of Toyota. However, it is necessary
for GAC Toyota to set some fields, like a temporary stockyard, where raw materials and
Market components are stored for only a few hours.

After only a few minutes, those materials and components will be put into manufacture.
According to the Just-in-time system, many components will not be produced until the
demand of the next manufacturing process happens. ―Zero inventories" as a concept of
logistics management does not mean that the actual inventory is zero, while the exact
meaning is ‗no excess‘ inventory. There is a warehouse called TEDA which occupies
over 5600 square meters and its daily operation capacity is more than 500 cubes.

Xiancheng introduced that both raw materials and components are delivered constantly.
Moreover, there are only few raw materials which will be kept for four hours. However,
in order to avoid stock-out, due to bad weather and traffic jams in winter, the warehouse
keeps the inventory for one or two days.

32
Factors on cost reduction

Initially, the difference between cost reduction and cost control should be given attention.
Cost reduction is an unstoppable process of critical cost examination, analysis and
challenge of standards.

Mersereau (1994) pointed out that cost reduction exists everywhere in the business, in
other words, productions, processes, manufacture, methods, organization and staff should
be considered. Moreover, cost reduction is critically examined and reviewed with a view
to improving efficiency and effectiveness and reducing the costs (Murphy, 2009).

Bruce (1992) defined that cost reduction is the application of procedures to monitor
expenditures and performance against progress of a project and manufacturing operations
with projected completion to measure variances from authorized budgets and allow
effective action to be taken to achieve minimal costs (Bruce, 1992).

Carroll (2009), it is essential that a firm implements the strategy of cost reduction and
cost control whenever the firm experiences tough time or to propel future growth. A lot
of literatures have been written about the methods of cost reduction. According to John,
Brierley, Cowton & Colin (2007), cost reduction and cost control can be achieved
through several approaches. However, there are some popular approaches, like
elimination in the form of nonessential, non-value adding activities and modification of
manufacturing activity. In short, through in depth analysis, the best and least cost path is
adopted for each activity.

McCormick (2010) provided 10 steps to reach cost reduction as follows:

 Set a minimum cost reduction target.

 Establish whether budgeting can achieve the target
 Place cost reduction into the wider strategy of the business.

33
  Identify the economic drivers of cost
 Analyzing costs with the value chain
 Consider outsourcing non-core activities
 Restructure the labor force
 Manage the change process carefully
 Monitor the results diligently.

Product Material is the basis of manufacture and in a system of factory costs, it should be
first considered (Watts, 1902). Kiesling (2010) considered that material handling can
influence operation cost.

Bisset (1960) mentioned that material cost is the largest element of manufacturing costs
in our company. Penfield (2007) mentioned that depending on the industry much of the
supply chain costs can be contained in material purchases. Hence, most companies focus
their cost reduction efforts on the materials they purchase. Therefore, cutting materials
costs can reduce costs directly.

Some previous scholars mentioned how to reduce materials costs, such as picking
appropriate materials and avoid the use of expensive materials; check and minimize
waste concerning all materials in the process of production; develop a budget related to
materials; avoid the loss of materials due to faulty equipment; establish strict control over
all materials; be sure that employees do not use the wrong materials for specific projects
(May, 1994, Tait, 2004).

Labor has equal importance with the cost of the materials used in the process of
manufacturing (Watts, 1902). McCally (1998) considered that labor cost is perhaps the
largest risk faced by the self-performing contractor and control of the labor cost is one of

34
the tool used to reduce costs. McCormick (2010) considered that restructure of the labor
force is a necessary step of cost reduction and cost reduction. Watts (1902) divided this
into two kinds of labor: productive labor and non-productive labor.

According to the International Labor Organization (ILO)'s definition, labor cost covers
wages, earning and compensation. Some previous scholars provided some methods to
reduce labor costs, such as minimize excessive and expensive repeat work; set accurate
work standards with the labor force and periodically update your work standards; monitor
worker performance in real time; increase employee morale through improving the
working environment; break down the language barrier (May, 1994, Maida, 2002)

The soul of business is to earn money. In order to survive in the competitive market,
enterprises have to seek their new profit spot. It is easy to find that saving
money/reducing costs is a way to increase profit by eliminating waste (Mintcloud, 1995).
This an idea shared with Davis (2008) that any money saved becomes the company‘s
profit

Logistic management is the idea that saving money in the whole industry (Visser, 2007)
so that manufacturers could reduce their costs, whilst increasing profits simultaneously.
A good approach to reduce costs, especially in inventory costs, was named Just-in-time.
According to Polito and Watson (2006), low inventory relies on effective logistic
management and quick responses from suppliers.

Bartholomew (1984) pointed out that the philosophy of Just-in-time is to take immediate
action to meet the demand and requirement. According to Foster and Horngren (1987),
although Just-in-time will increase the direct traceability of costs, it eliminates more
facility of the warehouse and materials handling costs. In addition, Grout and Christy
(1999) stated that U.S companies found the Japanese method could control inventory
trickier and improve the efficiency.

35
Supplier chain management Since the 1980s, a supply chain had been developed that was
based on the value chain. The definition given by the Supply Chain Council is that the
supply chain includes production and effort of delivery of a final product and service
from the suppliers of suppliers to the customers of customers

Production cost

According to Apergis and Rezitis (2004), there are all kinds of expenses in the cost
structure in a company, these items containing labor costs, material costs, equipment
costs, information costs, technology costs, resource costs, financial costs and
management.

Generally, every company has a difference in the proportions of the total cost. Among
these costs, production costs occupied a high proportion position in the total costs. From
the perspective of Wang (2007), the greater proportion of one cost item it is, the more
attention should be paid to the item.

36
Entry strategies

There are several strategies available to enter a new market. However, considering the
special policy environment in the Chinese market, this dissertation just mentioned joint
venture and agents.

These strategies are hypothesized that they could help companies reduce entry costs,
because joint venture is very common in the Chinese auto market, according to the China
Development Research Center of the State Council's Report of Chinese Automobile
Industry development (2011).

This phenomenon that almost all overseas automobile brands enter the Chinese
automobile market through joint venture or agents, it is necessary to consider whether it
has a positive effect on cost reduction or not.

Some previous researchers (Isbel & Robin, 2008) mentioned that entry strategies can help
companies reduce costs, while they did not mention the automobile industry. Therefore
we put entry strategies in our framework and try to verify whether there is a relationship
between entry strategies and costs reduction and cost control.

Logistic management

Basically, the concept of cost reduction and cost control in logistics derives from a
Japanese professor, Nishizawa Syuu (1970). In his opinion, the market share that the

37
enterprise has occupied is limited; when it couldn‘t be extended, the enterprise has to
seek a new spot of profit to maintain the competitiveness in the market.

The professor suggested reducing the high percentage of logistics costs, in order to seek
the new profit spot and increase an enterprises‘ profit. In addition, the automobile
industry in the Chinese market becomes more competitive.

Chinese government, entry costs have to be considered, whether a suitable method can
reduce entry costs. Secondly, production costs play a key role in the automobile industry.
The lower production costs they operate, the more competitiveness and profit they obtain.

Therefore, how to reduce production costs in the Chinese automobile industry should be
considered. Thirdly, there is a increasing phenomenon that managers and researchers pay
attention on cost reduction in the recent decade. We want to identify how the methods
have been implemented to reduce logistic costs.

GAC Toyota pays more attention to supply chain management than since they focus on
cost reduction and control via supply chain management. The most important thing for
GAC Toyota is ‗zero inventories‘.

The manufactured models are original from orders and demands are designed to
eliminate all waste in the whole supply chain. Xia and Tang (2011) pointed out that
remedying supply chain management plays a key role in saving money in the automobile
industry. The similar view is shared by Toyota, making improvement unstoppable.

GAC Toyota can gain the lower price for raw materials. Furthermore, according to the
interview with GAC Toyota, they will reselect their suppliers regularly. However, GAC
Toyota will also consider the quality and the price and then trade-off. Therefore, the
results of short-term cooperation with the suppliers reduces parts of the cost.

An example was given that the suppliers of GAC Toyota will not produce the raw
material until the demand happens three hours beforehand. GAC Toyota can hold

38
inventory as low as possible by this approach. Toyota can not only hold low inventory
but also their suppliers could hold low inventory. By this way, the suppliers can obtain
the benefit of low inventory from the Toyota‘s supply chain management and the
suppliers‘ manufacturing could be reduced.

Logistic management and supply chain management, there are five factors which play
key role in it. However, they are not managed by automobile companies themselves.
Since the core competency of automobile manufacturers is to develop and manufacture
automobiles, they formulate and implement outsourcing logistics to a third party logistics
company. By this approach, automobile manufacturers can not only benefit from
reducing investment of labor and equipment but also reduce the logistic cost.

Therefore, outsourcing logistics can reduce the labor and equipment in the field of
logistics, and the third-party logistics company will charge cheaper than automobile

39
manufacturers since the third-party logistics is professional and has the advantage of
economic scale.

Additionally, another important factor reducing costs of logistics is the management

information system. Every automobile manufacturer has their own information system
which helps them control the inventory and share the demand of raw materials to
suppliers.

Raw materials will not be produced in advance until the demand is given. Sharing
information via an information system, both suppliers and manufacturer can keep low
inventory Therefore, outsourcing and information systems play two vital roles in cost
reduction of supply chain and logistics.

Outsourcing is a tool to solve a company‘s logistics problem rather than reducing costs
directly. Through the strategy of outsourcing, the whole supply chain is provided with
logistic services and then every link will reduce costs. Similarly, an information system
can help a company monitor and maintain their inventory at a low level. Both
outsourcing and an information system cannot reduce costs and control directly, but they
are also important for a company to reduce costs. Additionally, it is suitable for a Chinese
automobile company to formulate and implement.

Transportation cost

Transportation fee is relevant to delivery time and route. In order to reduce

transportation fees, it is essential to improve routes and shorten delivery time for the
third- party logistics company and automobile manufacturer in the Chinese market

40
Order cost: The quantity can be ordered in an economical approach. Order cost is
relevant with the maintainance fee, delivery cost and cycle of demand. According to the
different reality of the situation, order costs can be reduced via the method of EOQ.

Inventory cost

It is the inventory cost that the manager in the company wants to reduce dramatically.
One approach is to reduce the inventory cost which is to categorize the raw materials in
the warehouse into three classes, managing them with a different role.

The information system also plays an important role in reducing inventory costs. Among
a variety of information systems, Toyota‘s Just-in-time is imitated by other automobile
companies because ‗zero inventories‘ result is to reduce cost both to the manufacturer
and suppliers obviously.

Recessive cost

This kind of cost is unstable, due to uncertain factors. However, recessive cost in
automobile manufacturers can be reduced by outsourcing logistics. The qualified staff
and professional services could have a positive effect on satisfying the requirements that
delivery is achieved safely and without damage from automobile manufacturers. In
addition, delivering raw materials at the right time, in the right places and in the right
quantity are also helpful to reduce the recessive costs of stock-out cost.

There is an undoubted relationship between production sectors and cost reduction, which
has been proved by empirical data and analysis. The production sectors include labor and
materials and they can help automobile companies reduce production costs directly
through some different measures, such as priority of cheaper labor, standardization and
improvement of productivity.

There is no obvious relationship between entry strategies and costs reduction according to
the empirical data and analysis. Joint venture and agents are very common in the Chinese
automobile market, but there is no information which can prove joint venture and agents
can help automobile enterprises reduce entry costs in the Chinese automobile market.

41
CASE STUDY ON NIGERIAN BREWERIES PLC

Cost reduction and Cost control program has become an important practice among
manufacturing firm in Nigeria the Introduction of cost reduction and cost reduction
program has increased productivity, reduction of unit and total cost of production and an
increased in the profitability and growth of manufacturing firm in Nigeria.

It was in this line that this study aims at evaluating the effect of cost reduction and cost
control techniques to achieve profitability in manufacturing firm in Nigeria using
Nigerian Breweries Plc Lagos as a case study.

The study objectives are to examine the effect of cost reduction and cost control
techniques on the performance of manufacturing firms in Nigeria. Both primary and
secondary data were employed for the study.

The researcher recommends that manufacturing firms should institute or continued the
use of cost reduction and cost control scheme or program. This will help in avoiding
unnecessary cost. The researcher also recommends that manufacturing firms should
consistently review the method and techniques of cost reduction and cost control
approved by management in line with the rate of inflation in the economy.

According to Aboyade (1983) Cost and revenue in business undertaking form part of
what determines the financial performance and position of a business concern. Since
management is concerned with profitability which is the measure of business
performance, especially in the manufacturing concern, certain management techniques is
very necessary.

42
Mastery the technique in a business can help one to achieve the basic objectives of setting
up a business and making it profitable (Oniwuliri, 2009).

Hanson (1982: 21) pointed out that ―the aim of all production is to satisfy human wants
and make or maximize profit‖. However in carrying out this production, certain costs are
incurred. For any business to achieve it‘s set objectives, adequate and effective cost
reduction and cost reduction measures (formal or informal) should be adopted, in order to
achieve the organizational objectives.

The effectiveness of the these measures however may have helped some of these
companies to remain in business irrespective of the harsh economic condition, like
inflation among others (Collins & Moore 2006).

According to Iyahen, (2015) many Nigeria business establishments especially the

manufacturing sector are in serious profit squeeze. Iyahen, (2016) also pointed out that
there are number of factors accounting for this which include, the increasing cost of
running business in Nigeria, drastic fall in Nigeria foreign exchange earnings.

The situation is further aggravated by triple digit inflation currently present in our
economy. The structural adjustment program and payment of long excise duties have
caused some companies to be closed either indefinitely or produce at a high cost, thereby
making the price of local goods to be high while the sale volume is low.

All have resulted in poor profit margin, retrenchment or winding up. Firms therefore are
struggling to maintain satisfactory pay-off where costs are continuously increasing which
is becoming difficult to sustain.

43
To maintain earning in the face of this harsh condition, there is need for companies to
make decision with regards to cost reduction and cost control culture, to enhance
profitability (Onuoha, 1993: 32). In addition to these, it will enhance competitive ability
and generate reasonable profit margin for survival, growth, and expansion of the
business.

Finally, it is appropriate to say that the identification of these problems faced by some
industries and the provision of solution to it will not only improve the profitability of its
operation but also help in the improvement and betterment of the Nigeria economy.

Statement of the Problem

Every business activities result in the occurrence of cost and excessive cost could lead to
a reduction in profits which is contrary to the purpose of any business endeavor, which is
to maximize profits (Addison; 1980: 54). In Nigeria today, the economy is in extremely
bad shape (Osakwe, 2016). Cost of production has been in the increased in the
manufacturing sector of the economy, which in effect has resulted in a low contribution
margin for the firm, thus making the business unprofitable.

Bathy (1980:82) asserts that greater effort should be made by manufacturing firms to
keep cost to the lowest minimum, through efficient and effective utilization of the
resources to achieve profitability. Many manufacturing firms are faced with the problem
of how to embark on cost reduction and cost control scheme and also to make it more
effective and efficient in order to achieve desired goal.

Moreover the problem of inefficiency under the utilization of resource has a tremendous
effect on our economy and should be taken into full consideration . Organizations are
faced with the inability to make enough profit and achieve increase in productivity. This

44
is due to the inability to reduce cost installing the appropriate cost reduction and cost
control techniques in their businesses.

It follows that it is essential to monitor the cost of production. So how then can cost be
effectively applied in an organization to help management attain it goals in an inflated
economy? According to Adeniyi (2009) cost reduction and cost reduction campaigns are
often introduced at a rush to reduce the cost of production of goods.

Generally, this study is aimed at impact of cost reduction and cost control technique in a
manufacturing sector to achieve profitability in an inflated economy with Nigeria
Breweries Plc as the case study. Specifically, the study will be conducted to:

1. To find out if cost reduction and cost control scheme are applied in the Nigeria
breweries Plc.

2. To find out how effective, the resources of Nigeria breweries Plc are utilized to
improve profitability.

3. To investigate if the cost reduction and cost control technique of Nigeria

Breweries Plc has a significant effect on the profitability of the business.

4. To offer suggestions on specific cost reduction and cost control techniques to the
company under review.

This study, on the impact of cost reduction and cost control techniques to achieve
profitability in manufacturing sector will be based on the following questions to help
direct the study.

1. Is there any cost reduction and cost control scheme or program Nigeria breweries
Plc if not, is there any possible means of installing a cost reduction and cost control

45
system so as to eliminate avoidable cost or waste and enhance the Nigeria Breweries Plc
Profitability.

2. Does effective cost reduction and cost control technique any significant and
positive impact on the profitability and growth of Nigeria breweries Plc?

3. Does effective cost reduction and cost control technique help in the achievement
of increase productivity?

4. Does effective cost reduction and cost control technique help in reduction of unit
cost and total cost of production?

Significance of the Study

This study on the impact of cost reduction and cost control techniques to achieve
profitability in (A study of Nigeria Breweries Plc) will generally educate the entire public
on how cost reduction and cost control program will be an effective tool employed by
management of business organization in achieving profitability in an hyper inflated
economy.

This study will also be of immense benefit to business organization especially Nigeria
Breweries Plc to improve upon their cost reduction program as a measure of reducing
cost of production.

Scope and Limitation of the Study

This research study is strictly limited to manufacturing industries with special

regard to Nigeria Breweries Plc.

The researcher is interested in the way this firm is carrying out its business operation in
the face of our hyper inflation and business uncertainties.

46
Historical Background of Nigeria Breweries Plc

Nigeria breweries Plc, was in incorporated on 16th November, 1946 and recorded a
Landmark when the first bottle of star larger beer rolled off the bottling lines in its Lagos
Brewery in June 1946.

This was followed by Aba Brewery in 1957. Kaduna Brewery which was commissioned
in 1963 followed by Ibadan Brewery in 1982. In September 1993, the company acquired
it fifth brewery in Enugu. On April 9, 2001 it also laid another foundation for yet another
brewery in Enugu which has started operation.

From its humble beginning in 1946, the company now have six (6) operational breweries
from which it high quality product are distributed to all parts of this great country.
Nigeria Breweries Plc has a rich portfolio of highquality brands namely:

Star Larger Beer Introduce in (1949)

Gulder Larger Beer Introduce (1970)

Maltina Introduce in (1976)

47
Legend Extra Stout Introduce in (1992)

Amster Malta Introduce in (1994)

Schweppes Orange Drink Launched in (1996)

This was followed by the launch in Nigeria market Heineken larger Beer in June 1998.
However, in August 2001, the company decided to exist the carbonated soft drink market
because, of the need to concentrate on it area of core competence.

Nigeria Breweries Plc keeps space with key international developments thus, ensuring
that it system, processes and operational procedures is always in conformity with the
world class standards. It is in line with the policy that the company established a research
and development centre in 1987, to enhance its research activities on all aspect of
brewing operation.

In almost every business, the most commonly collected data internally, used by
management is the cost data. An understanding of cost concepts is necessary for an
understanding of business decision making and management accounting.

The word ―Cost‖ can be viewed in various ways. Horngren (1989) defined cost as
Sacrifice or giving up of resources for a particular purpose: The above definition saw cost
as the amount of expenditure or resources expended in trying to achieve a particular
objective. For revenue to be generated, cost must be incurred (Begg; 1991). Cost
therefore is necessary and its understanding is very important as it covers a wide variety

48
of meaning. Cost is a sacrifice that must be made in order to acquire a benefit or a
satisfaction (Lipsey 1983).

According to Drurcy (2005) cost can be defined as a measurement in monetary terms, of

the amount of resources used for some purpose. Harper (1982:190) also defined cost as
the resources used up in achieving a particular objective measure in money terms. Three
important ideas are included in the definition.

1. The notion that cost constitutes the use of resources. Cost measures how much of
these resources were used.

2. The second idea is that cost measurement is expressed in monetary terms. Money
provides a common denominator that permits the amount of individual resources, each
measured according to its own scale to be combined, so that the total amount of all
resources used can be determined.

3. Thirdly, cost measurement is always related to a stated purpose (objectives).

Various Method of Costs and Practices Used by Nigeria Breweries Plc

Cost Reduction Techniques

Generally, cost reduction should not be confused with cost control. According to
(Adeniji, 2009) cost reduction is the reduction in unit cost of goods or services without
impairing suitability for the use intended.

Cost reduction can be seen as cost savings and or cost economy (Kapland & Atkinson
1998). A term used to give a description of the process of maintaining consistent cost
savings as well as maintaining the quality and usefulness of the product. The chartered

49
institute of certified management accountant (CIMA 2005) expanded cost reduction as it
includes:

i. Unit cost reduction by expenditure minimization in respect for a given volume of

output.

ii. Unit cost reduction by increase in yield rate of output for a given expenditure.

Foster (2002:40) assert that Cost reduction is a useful method for achieving any amount
spent in the course of a business operations and this will be achieved by combining
expenditure reduction, increase in output yield, creating redundancy as to reduce the staff
strength and light budget.

Cost Control

Cost control is an important and has always been an important issue but perhaps most
important in today‘s unpredictable market with few exceptions, at no other time in history
has the business market been more dynamic.

Unlike the largescale enterprises, the small and medium scale enterprises (SMES) have
been starving by financial needs, poor implementation and monitoring of projects, time
and cost overrun, nonpayment of loans and harsh economic conditions.

The issue of cost control management is necessary in the operations of manufacturing

companies in order to adequately utilize the material resources. Furthermore, cost control
involves the management measures implemented to ensure that cost proceeds in
accordance with management plan.

The importance of cost control cannot be over emphasized as a survival technique for
manufacturing companies, because they ensure proper monitoring of cost against budget
and correct any financially impropriety of the company.

50
Cost controls starts by the businesses identifying what their costs are and evaluate
whether those costs are reasonable and affordable. Then, if necessary, they can look for
ways to cut costs through methods such as cutting back, moving to a less expensive plan
or changing service providers.

The cost-control process seeks to manage expenses ranging from phone, internet and
utility bills to employee payroll and outside professional services. For example, the
researcher observed in the course of this study, that for a company to be profitable, they
must not only earn revenues, but also control costs.

If costs are too high, profit margins will be too low, making it difficult for a company to
succeed against its competitors. In the case of a public company, if costs are too high, the
company's may find that its share price is depressed and that it is difficult to attract
investors

Difference between Cost Reduction and Cost Control

In certain circumstance, cost reduction is often used as if it were synonymous with cost
control. However, there exist some significant differences between them as outline by
(Berliner 1988).

1. There is recognition of the dynamic and everchanging nature of companies via

cost reduction techniques and as a result changes in cost are expected. In the case of cost
control, the lowest cost if condition that prevails attempts to control its operations.

2. Cost reduction can be effective for virtually all kinds‘ condition without any
restrictions to where standard costing can be applied. With regard to cost control, it can
only be applied effectively only when certain standard can be set.

51
3. Standard in cost reduction are regarded as measuring rule which is capable of
being viewed with sub precious. For cost control, it is taken to be the denied state of
efficiency.

4. Cost reduction deals with real cost-savings. Certain cost exists as well as intention
to reduces them. With regard to cost control, it deals with adheres as closely as possible
to set standard.

Analysis and Classification of Cost:

Cost analysis is an important factor for achieving systematic cost economics (Bromwich
1994:82). In its absence many opportunities are missed. This can be made easier if an
efficient and effective accounting system exist in the organization. In order to analysis
cost of production the researcher classified cost in the following ways.

Manufacturing costs: Manufacturing costs are those costs associated with the
manufacturing activities of the company. Manufacturing costs are subdivided in three
categories: direct materials, direct labor, and factory overhead.

Direct Materials are all materials that become an integral part of the finished product.
Example is steel used to make bottle rinks.

Direct Labor: is the labor directly involves in making the product. Examples of direct
labor costs are the wages of assembly workers in an assembling line and the wages of
machine tool operators in a machine shop. Indirect labors, such as wages of supervisory
personnel are classified as part of factory overhead.

52
Factory Overhead: can be defined as including all costs of manufacturing except direct
fringe benefits, and cost of idle time. Factory overhead is also called manufacturing
overhead.

Non-Manufacturing Costs: Non-Manufacturing costs are (or selling expenses, general

and administrative expenses). Selling expenses are all the expenses associated with
obtaining sales and the delivery of the product, Examples are advertising and sales
commissions. General and administrative expenses include all the expenses that are
incurred in connection with performing general and administrative activities. Examples
are executive salaries and legal expenses.

Variable Costs: Variable costs are those costs that vary directly with the output (Bentley
1998:115). They are the cost of the variable factors. Examples are operative labor, raw
material, fuel for running the machines, wear and tear of an equipment cost.

Fixed Cost: These are costs which do not vary in direct proportion to the firm volume of
output (Bentley; 1998:117) they are cost indivisible factors like building, machinery and
vehicles. They are otherwise known as capacity cost.

Bingham (1976) assert that Materials should be purchased in large orders thus resulting
to reduce cost per unit of input. In the context of economic buying price polices, the
following strategies in lowering purchase price are capable of having success.

1. Economy of large orders

2. Economy of charge supply

3. Economy of product substitution

53
 The Production Department

The best production process is that which produces the same level of output using the
finest input or the one that is technically most efficiency in the production department
(Bringham:1976) cost reduction can be achieved by these means.

Material Substitution:

This is the introduction of cheaper material without impairing the quality that could affect
the sales and profit. Substitution of materials should occur only where it is complete
satisfactory, both technically and economically.

Here, the principle of substitution is going to be used to demonstrate materials

substitution. It includes least-cost production, least cost rule and its application.

The Sales Department

Resulting from the purchase of inputs at least cost, cost per unit is reduced. It then
become possible for the firm to sell at a relatively lower price and still makes profit.

The available staff should be used to capacity. Very often the sales staff have not been
working to capacity and hence a far greater quantity of goods can be sold at extra cost.
Advertising and sales promotion may be used to boast sales (Hazel & Raid: 2007:92).
However, the cost should be measured with the benefit derived.

Personnel and Administration Department

The personnel and administration department has the prerogative if the need arises to
streamline the staff strength of the business organization. Otherwise, a disproportionate
part of the company‘s revenue will be spending on administration cost and redundant
employees with very little left for development program and project. This calls for the

54
need for man power planning. Substantial centralization of management is necessary to
reduce the occurrence of dysfunction behavior amongst individual department at
management. Extreme decentralization has the following cost as outline by (Hazel &
Raid 2007:102).

1. Managers make decisions that are not in the organization best interest by:

(a) Focusing on and the acting to improve their own segments, performance at the
expenses of the organization.

(b) Not being aware of relevant facts from other departments. Manager tend to
duplicate service that might be less expense when centralized (accounting, advertising
and personnel are example) cost of accumulating and processing information frequently
rises.

However, every administration in any organization exhibits both centralization and

decentralization features. It is a fact that some degree of centralization is necessary for
the purpose of organization certain critical administrative functions and promoting
efficiency in sustaining a planned volume of activity while the cost is unaffected by the
actual activity level achieved.

Planning for Cost reduction

There are two basic approaches to cost reduction

(a)Crash Programs to Cut Spending Levels: If an organization is having problems with

its profitability or cash flow, the management might decide on an immediate program to
reduce spending to a minimum. Some current project might be abandoned, capital
expenditures deferred, employees made redundant or new recruitment stopped and so on.

The absence of careful planning might give such crash program the characteristics of the
panic measures an authoritarian dictatorship from top management. Cost reduction and

55
Cost control measures might be too little and too late, or misdirected. Poorly-planned
crash program to reduce costs might result in decisions which seriously reduce operation
efficiency without the effects being immediately noticeable.

(b)Planned Program to Reduce Costs: Many companies tend to introduce crash

program for cost reduction and cost control of prosperity; a far better approach is to
introduce continual assessments of an organization‘s entire products, production
methods, services internal administration systems and so on. The management
accountant will normally become involved when compiling reports on the costs and
benefit analysis of the cost reduction schemes themselves.

Cost Reduction Analysis

The Nigeria business environment economy is troubled by a very high rate of inflation.
There is urgent need to recognize the introduction of cost reduction program in the
manufacturing industry that operates in this country. George (1981) pointed out that Cost
reduction program is instituted to achieve the following objectives.

i. To increase the rate of profitability of these organization this is necessary for

their enhancement and growth. The cost economies achieved will be put back
into the business and increase the organization chances of efficiency and
effectiveness in its operations.

ii. To reduce the occurrence of unnecessary and avoidance costs. Unnecessary cost
normally exists in an organization and the identification of these cost and their
subsequent elimination is one of the major aims of introducing costs reduction program.

Such cost as defined by Crawford (1990) are cost that can be eliminated without reducing
the quality of the product or service provided. Drucker (1999) saw it as ―those cost that
will not continue if an ongoing operation is changed or deleted. Sometimes it may be

56
necessary to delete the production of certain product or change the ongoing operations.
This is done when it is observed that the confirmation of existing operation will yield less
and even loss to the total contribution.

iii. To eliminate occurrence of wastage in the functional area of an organization.

iv. To introduce alternative with regard on least cost in the production department
and other functional areas in the company.

Techniques and Methods of Cost Reduction

There are various methods adopted by various organizations in cost reduction.

Improving Efficiency and Standards: one way of reducing cost is to improve the
efficiency of material usage, the productivity of labor, or the efficiency of machinery and
other equipment. There are several ways in which this might be done;

(a) Improved Materials: where wastage is currently high. Wastage might be reduced
by one of the following methods:

(I) Changing the specification for cutting the materials.

(ii) Introducing new equipment that reduces wastage in processing or handling

materials.

(iii) Identifying poor quality output at an earlier stage in operational processes.

(iv) Using a better quality of materials. Even through more expensive, better quality
materials might save costs because they are less likely to tear or might last longer.

b. Labor Productivity: can possibly be improved by the following methods:

(I) Giving pay incentives for better productivity.

(ii) Changing work methods to eliminate unnecessary procedures and make

better use of labor time.

57
(iii) Changing work patterns or schedules so as to smooth out seasonal fluctuations
over the year and reduce the need for overtime payments as the height of seasonal
production. This can also reduce non-conformance quality costs, that is, the cost of faulty
goods produces under pressure during unrealistically high overtime periods.

iv. Improving the methods for achieving co-operation between group and
departments.

v. Setting more challenging standards of efficiency to aim for. Standards should be

tight but achievable. If efficiency standards are too lax, it is likely that the work force will
put in the minimum effort needed to achieve the required standards. Given the right
motivation among the workforce, more challenging standards will encourage greater
effort.

vi. Introducing standards where they did not exist before.

(c) Improving the Efficiency of Equipment: usage might involve the following.

(I) Making better use of equipment usage involve the following:

(ii) Achieving a better balance between preventive maintenance and machine down-
time ‗for repairs.

Production Management System

Image (2003) defined production management as the job of coordinating and controlling
the activities required to make a product typically involving effective control of
scheduling, cost performance, quality and waste requirements.

Production management is the act of planning organizing, directly and controlling of

production activities for achieving efficient and effective use of production resources
(Adam 1984). Some of these management changes have been so sweeping that they have
changed the whole manufacturing culture, especially in WCM companies. Some of the

58
system, especially just-in-time (JIT) have challenged traditional views of manufacture
and, it is claimed, have been largely instrumental to the success of Japanese
manufactures. Two of the main production management systems are described below
(Adeniyi: 2009)

• Materials requirement planning (MRP)

• Just-in-time (JIT)

Materials Requirement Planning (MRP)

MRP is a computerized information, planning and control system which has the objective
maintains a smooth production flow. It is concerned with:

• Maximizing the efficiency in the timing of orders for raw materials or parts that
are placed with external suppliers.

• Efficient scheduling of the manufacture and assembly of the final product.

Just-In-Time System

Ohno (1988) defined just in time system as an inventory strategy companies employed to
increase efficiency and decrease waste by receiving goods only as they are needed in the
production process.

Just in-time (JIT) system can be grouped into two (2) as outline by (Lucey: 2002:33)

(a) Just-in-time purchasing

b. Just-in-time production

Just-in-Time Purchasing

According to Womack & Jones (2003) JIT purchasing refers to the technique of
eliminating waste during the purchasing phase with the help of the mutual understanding
with good suppliers. The system tends to match the consumption/usage of materials from

59
external suppliers, whereby the delivery of materials immediately precedes their use. The
implementation of JIT purchasing techniques claim to have substantially reduced their
investment in raw materials and work in process stocks.

Just-in-Time Production

Lubbe (1988) defined just in time production as methodology aimed primarily at

reducing flow times within production as well as response times from supplies to
customers.

This is to reorganize the production process by dividing the many different products that
an organization makes into familiar or similar or similar products or components. JIT
production works on a demand-pull basis and seeks to eliminate all waste and everything
which does not add value to the product.

JIT systems convert materials to finished products with a lead time (delivery time) equal
to processing time, so eliminating all activities which do not add value to production
(Hall;1987).

Activity Base Costing Analysis

60
Activity Base Costing is a method of charging overhead to cost units on the basis of
benefits received from the particular indirect activity (Molimina: 2001). According to
Armitage & Nicholas (1993) Activity Base Costing is a costing methodology that
identifies activities in an organization and assigns the cost of each activity with resources
according to the actual consumption by each.

ABC analysis is a device formulated to reduce the cost of material inputs expended in
the production of a given output. Its mode of operative principle is that, only a small
percentage of the parts used caused the greater material costs. There are three categories
of material used in the production as outline by (Armitage & Nicholas,1993)

A - Materials most often used in Production.

B - Materials second most often used in production.

C - Materials least often used in production.

Efforts to find chapter distributors less expensive replacement items and many other are
encountered on the ―A‖ group. The ABC plan concentrates on important items and is
also known as control by importance and exception (C.I.E).

The research is for the least cost material which consumes some time and financial
resources for any of the three categories.

However, since most material cost are for category ―A‖ it showed all the time available
for trying to reduce material cost be spend in searching for the least material sources cost
economic will be achieved if amount of time is spent on each of the three categories.

Absenteeism Control

Onuoha (1993) identifies leaving the organization or frequently absenting oneself from
work as one of the major consequences of inequity. A highlight of (Adam‘s 1969)

61
―equity theory‖ state that inequity exist in an organization when the workers ratio of
inputs (workers contribution) is less than the ratio of reward and benefit they receive.

This will spark on dissonance, which provides basis for motivation. The individual will
then be motivated to do something to reduce the dissonance and restore equity or balance.
Some of the unnecessary cost caused by absenteeism as outline by (Onuoha 1993):

a. Disrupted schedules

b. Idle machinery.

c. Over time shipment

d. Invoice delay

e. Poor working conditions

f. Lack of job security

g. Conflict with co-employee

h. Lack of recognition for good work done

I Lack of communications with supervisors

In order to control the high rate of absenteeism there is the need to motivate workers.
Equal payment for equal work done, Promotion of industrial peace and harmony. For
where these exist, the company is not only bound to grow but also at a very fast rate.

Factors that Influence Profitability

Onuoha (1993) identified certain factors affecting the profitability of business

organization. These factors include the following:

1. Oscillation in the Economic Trend:Firms are normally in business to make

profit. However, the performance of business is influence by economic conditions. An

62
economy passing through depression, recession, recovery and boom economy influences
the operations of the firm.

2. Technology

Introduction of new method of production technology helps to reduce unit cost,

facilitating production and increase profitability of the organization.

3 Managerial Skill

Possession of certain management skill is necessary for business success in most cases.
An estate manager will plan and forecast future business activities in the light of any
contingency. The remedy as (Onuoha:1993) rightly pointed out is ―a Continuous training
and development programmed for entrepreneurs and their employees‖

4.Demand and Price: The demand for the product of business determines the
survival of the company. Increase in demand when supply is constant causes an
increase in price. Increase price result to high profit

Role of Profit in a Business

No business is conducted in such a manner that is considered unimportant. Robert (2010)

asserts that for a business that consistently fails to make profit will sooner or later cease
to exist. According to Siddiqi (1971) a feeling for profit must be the need by all
managers in the organization if the company must be successful. A business whose
individual members have no senses of profit responsibility is a depressing sight. Some of
the roles therefore performed by profit in an organization include (Kuntz 1980).

I. Ensuring survival of the company as well as speeding up the growth rate and
expansion of the business.

ii. Profit is used as a measure of the level of success of an organization as against

other similar firms.

63
iii. Profit helps the organization to plan adequately.

iv. Profit serves as an incentive to workers.

v. Profit as a means of management control.

From the above points, we can see that invariably, business decisions are profit decisions.
Kuntz (1980) states that profit control is a management technique as well as a control
technique. The reason is that profit control involves the analysis of actual performance
against the planned and the authority to take corrective action, all of which fall within the
armpit of the business manager.

Features of Profitability

It has been noted that profit is indispensable for the survival and growth of a business. In
the words of (Siddiqi:1971) ―a company that fails to make adequate profit will die/fold
off because of the shareholders dissatisfaction or because the company cannot generate
fund for growth and corporate renewal on which every company depends on.

Business organizations increase their profit and reduce their cost without fraud or
deception. Strategies adopted in this regard include the following:

I. Employment of capable, professional and efficient managers.

ii. Proper and productive employment of the organization resources.

iii. Introduction of new technology in the mode of production to increase output and
reduce per unit cost.

iv. Providing the necessary finance to implement project plans of the organization

v. Introduction of management by performance by incorporating the personnel goals

of employees into that of the corporate.

64
CHAPTER NO 4 DATA ANALYSIS AND INTERPRETATION

1.Are you Familiar with the terms Cost control and Cost Reduction?

yes no maybe

10%

20%

70%

The above chart shows respondents response whether they are aware of the terms Cost
Control and Cost reduction. 70% agreed with yes and 20% were not familiar with both
terms.

65
2.Do you think Cost Control is important to an organization as it regulates and reduce
unwanted expenses?

yes no maybe

5%

10%

85%

The above chart shows respondents response whether they think Cost Control is
important to an organization as it regulates and reduce unwanted expenses.85% agreed
with yes and 10% were not agreed with it.

66
3.Do you think Reducing Cost directly reflects an increase in the level of profits of an
organization?

5%
5%

yes
no
maybe

90%

The above chart shows respondents response whether they think Reducing Cost directly
reflects an increase in the level of profits of an organization. 90% agreed to question and
5% not agreed.

67
4.Do you think Manufacturing sector‘s performance is being affected by very high cost of
production and operational costs?

1%
11%

strongly agree

22% agree
disagree
strongly disagree
66%

The above chart shows respondents response whether they think Manufacturing Sector‘s
performance is being affected by very high cost of production and operational costs. 66%
strongly agreed with it .22% also agree &11% disagreed to it.

68
 5.Do you think Every employee should be involved in suggesting Cost Control
initiatives with the department?

20%

yes
no
maybe
20% 60%

The above chart shows respondents response whether they think Every employee should
be involved in suggesting Cost Control initiatives within the department.60% agree with
the question and rest 20% did not agree.

69
 6.To what extend do you agree that companies should carry out educational
awareness on Cost Control and Cost Reduction issues?

strongly agree disagree neutral agree strongly disagree

11%

11%

11%

67%

The above chart shows respondents response to what extend do they agree that
companies should carry out educational awareness on Cost Control and Cost Reduction
issues. 67% strongly agreed rest 11% strongly disagreed some were neutral.

70
 7.Do you agree Manufacturing firms struggle to maintain satisfactory earning where
cost is rising?

strongly agree disagree neutral agree strongly disagree

10%

20%

50%

10%

10%

The above chart shows respondents response Manufacturing firms struggle to maintain
satisfactory earning where cost is rising. 56% strongly agreed to the question.

71
 8.Do you think are there any benefits to be derived from the implementation of Cost
Control and Cost Reduction in an organization?

20%

yes
no
maybe
20% 60%

The above chart shows respondents response whether they think are there any benefits to
be derived from the implementation of Cost Control and Cost Reduction in an
organization. 60% agreed with it &20% did not agreed with it.

72
9. Do you think Cost Control and Cost Reduction scheme affect the quality of the product
of the company?

5%
5%

yes
no
maybe

90%

The above chart shows respondents response whether they think Cost Control and Cost
Reduction scheme affect the quality of the product of the company. 90% agreed with it
&5% did not agreed with it.

73
10. Do you agree that effective cost reduction and cost reduction program have a
significant impact on the profitability and growth of manufacturing company?

yes no maybe

5%
5%

90%

The above chart shows respondents response whether they think that effective cost
reduction and cost reduction program have a significant impact on the profitability
and growth of manufacturing company. 90% agreed with it &5% did not agreed
with it.

74
11.Is there any possible means of installing a cost reduction and cost control systems so
as to reduce or eliminate wastages and enhance the profitability of manufacturing
company?

20%

yes
no
maybe
20% 60%

The above chart shows respondents response whether they think there are any possible
means of installing a cost reduction and cost control systems so as to reduce or eliminate
wastages and enhance the profitability of manufacturing company. 60% agreed to it .20%
did not agreed.
75
12.Do you think that cost control and cost reduction help to the management of
manufacturing firms towards the achievement of its ultimate goal-profit maximization?

5%
5%

90%

yes no maybe

The above chart shows respondents response do they think that cost control and cost
reduction help to the management of manufacturing firms towards the achievement of
its ultimate goal-profit maximization.90% agreed to it rest 20 % did not agreed.

76
13.Does the manufacturing company able to measure its performance by the use of cost
control and cost reduction techniques?

5%
5%

yes
no
maybe

90%

The above chart shows respondents response whether they think manufacturing company
able to measure its performance by the use of cost control and cost reduction
techniques.90% agreed it. 20% did not agreed.

77
14.The cost management practice of cost reduction and control tools and techniques
applied in this organization reduces the cost of products without affecting the quality of
the products?

20%

yes
no
maybe
20% 60%

The above chart shows the respondents response whether they think cost management
practice of cost reduction and control tools and techniques applied in this organization
reduces the cost of products without affecting the quality of the products. 60% agreed
with it rest 20% did not agreed.

78
15. Has cost reduction and cost control program provided any benefit to your company?

10%

10%

yes
no
maybe

80%

The above chart shows respondents response toward question whether they think cost
control and cost reduction has helped their company.80% agreed to it rest 10 % did not
agreed.

79
CHAPTER 5- CONCLUSION, SUGGESTIONS, FINDINGS

CONCLUSION

Based on the present theoretical background in the field, the costs reduction and cost
control of automobile enterprises in the Chinese automobile market, the problem and
purpose of the research is to find the kinds of factors that can help automobile enterprises
reach cost reduction.

How do those factors affect an automobile enterprises‘ costs reduction and cost control.
Although the theories which have been shown in the literature review, in the field of
logistics, the explicit cost includes transportation costs, order costs and inventory costs.

In addition, the return cost and the stock-out cost are composed to the implicit cost.
These five costs can be solved by planning the best route, the method of economic order
quantity, the method of activity based classification and Just-in-time.

However, it is necessary for those methods of cost reduction and cost control to be
supported by a management information system, and executing these actions by
outsourcing logistics. Therefore, an automobile company can reduce the cost of logistics
by two tools-outsourcing and a management information system, and implement different
methods to reduce different parts of costs.

The production sectors undoubtedly can help automobile enterprises reduce costs. The
production sectors include labor and materials, which have been mentioned in the part of
empirical data and analysis. Based on the section of empirical data, it‘s clear to find that
the labor costs in China are cheaper than Europe and the U.S; it means that the costs of

80
local production in China are lower than the production in Europe or the U.S and
important to China.

Therefore, overseas automobile companies and local automobile companies tend set up
manufacturing factories in the cheaper labor areas, which can help automobile companies
reduce production costs directly. Materials are factors to help automobile companies
reduce costs in the production sectors.

Initially, there are many researches on the theme of cost reduction and cost control. The
difference between them should be identified. But cost reduction is more attractive, and
the increasing phenomenon of a variety of companies has paid attention to it.

However, there is a great gap of reduction costs in the Chinese automobile market.
Because the Chinese automobile market has boomed in recent years, previous scholars
have not done adequate researches on cost reduction in the Chinese automobile industry.

Joint venture and agents can help companies reduce costs, but the empirical data and
analysis in this dissertation has shown that joint venture and agents cannot help obviously
automobile enterprises to reduce costs in the Chinese automobile market. Therefore,
these strategies are probably applied to other industries rather than the automobile
industry. Therefore, they are not suitable to the Chinese automobile industry.

The field of logistics is regarded as a new spot of profit, if it is possible to reduce the cost
of logistics. This study analyzed the different aspects of cost reduction in different
companies in the Chinese automobile industry. Most of these strategies of cost reduction

81
are popular in the European area and the U.S and can be recommended to the automobile
company in the Chinese market.

This research was simply designed to evaluate the effect of cost reduction and cost
control techniques to achieve profitability in manufacturing company a particular focus
on Nigerian Breweries Plc.

Profitability and financial growth continue to be the major drive in the business
community. Presently, Nigeria economy is passing through a very severe condition as
prices of goods and services are heavily eroded. This has affected the performance of
business operation. Manufacturing firms are now battling with high cost of production
which is affecting their profit margin.

Therefore, there is a significant need to adopt and implement cost reduction and cost
control strategies as soon as possible to avoid unnecessary cost and eliminate wastages
which could prevent the business of running into excessive loss. By this the
manufacturing firm will achieve its basic objective of increased profitability and growth.

Cost management practices of reducing and controlling manufacturing costs require top
management support, employees‘ involvement, responsibility accounting and different
cost control tools and techniques. Without top management support cost management
practices cannot be set up.

Since the ultimate goal of a company is making profit, cost management practices enable
to achieve the target. Manufacturing companies may prefer and use tools and techniques

82
like value analysis and value engineering, quality control, budgetary control, standard
costing system and target costing for the purpose of cost reduction and control.

With the use of cost control and reduction measures such as standard cost control,
budgetary control, responsibility accounting, employee involvement the company has
been able to control and reduce costs, enhance profitability and measure performance.
Cost management practices provide information, which aids the management of the firm
in making decisions concerning business operations.

Controlling and reducing manufacturing costs can be seen from the view point of
material utilization, labor utilization, wastage elimination and supervision of costs
incurred in the course of production. All these helps to enhance the earnings of business
entity.

Employee involvement is helpful in reducing and controlling costs of the company.

Motivation, incentives and job rotation can enhance the productivity of employees and
reduces manufacturing labor costs.

Suggestions

Based on the above findings, the following recommendations are made:

1.Cost reduction and Cost Reduction program with outstanding benefit should be
instituted or continued in every manufacturing firm. This will help in avoiding
unnecessary cost. All staff, both junior and senior should be educated of its existence in
the manufacturing firm.

2.The manufacturing firms should consistently review the techniques and methods of cost
reduction approved by management in line with rate of inflation in the economy.

83
3.Manufacturing firms should introduce management by objective (MBO) in their
organization. This will inspire and motivate workers to work maximally in the company
interest.

4.Manufacturing firms should ensure that method and techniques of cost reduction
adopted should not over or under state its gross profits figure and the reported profit in
the company financial statements.

5. The common challenge that hampers manufacturing industry‘s profitability is input

cost increase. Effective material utilization, wastage elimination, elimination of idle
time, efficient utilization of labor in the production process, skilled manpower,
training, introduction of incentives schemes that favor high productivity, eliminating
non-value-added activities will help to reduce costs and enhance profitability.

6. Employees are the most important asset in any organization. No matter how educated
and experienced, employees need a continuous training for operational improvement
in some specific issues they are working around.

7. The company currently set standards based on historical method. In setting product
cost standards, manufacturing companies must apply engineering method rather than
historical methods. Because in engineering method each operation is studied
thoroughly based on careful specification of material, labor and overhead costs.

84
Findings

The summary of findings is based on data presented, analyzed and interpreted in chapter
four.

That effective cost reductions and cost control techniques have a significant and positive
impact on the profitability and growth of Nigerian breweries Plc.

That effective cost reduction and cost control techniques help in the achievement of
increased productivity in manufacturing firms.

That effective cost reduction techniques lead to a reduction or minimization of the unit
and total cost of manufacturing firms.

Finally, effective cost reduction and cost control techniques help in overcoming the
effect of inflation.

The field of logistics is regarded as a new spot of profit, if it is possible to reduce the cost
of logistics. This study analyzed the different aspects of cost reduction in different
companies in the Chinese automobile industry

This research analyzes the empirical data, a serious of theories and models which have
been used to find different approaches to reduce cost. In order to be creative and show
with a clear picture, our model is shown in the conclusion.

The cost system we used is not general, but it has a trait of representativeness.
Furthermore, another key point of cost is developed and researched, which also plays a
vital role in the automobile company

85
BIBLIOGRAPHY

WEBSITES

www.Access Capital SC.com/research

www.nbplc.com

www.businessballa.com

www.divaportal.org

www.cor.ac.uk

REFERENCE BOOKS

Cost and Management Accounting Research. Journal of Management Accounting

Research.
 APPENDIX

IMPACT OF COST CONTROL AND COST REDUCTION ON

PROFITABILITY OF MANUFACTURING COMPANY

* Required

Full name *

Age

 Below 20
 20-30
 30-40
 Above 40 years

Occupation *

 Working professional
 Business
 Homemaker
 Others

1. Are you Familiar with the terms Cost control and Cost Reduction?
 Yes
 No
 Maybe
2. Do you think Cost Control is important to an organization as it
regulates and reduce unwanted expenses?

 Yes
 No
 Maybe

3. Do you think Reducing Cost directly reflects an increase in the level of

profits of an organization?

 Yes
 No
 Maybe

4. Do you think Manufacturing sector‘s performance is being affected by

very high cost of production and operational costs?

 Strongly agree
 Agree
 Strongly disagree
 Disagree

5. Do you think Every employee should be involved in suggesting Cost

Control initiatives with the department?

 Yes
 No
 Maybe
 6. To what extend do you agree that companies should carry out
educational awareness on Cost Control and Cost Reduction issues?

 Strongly agree
 Agree
 Neutral
 Strongly disagree
 Disagree

7. Do you agree Manufacturing firms struggle to maintain satisfactory

earning where cost is rising?

 Strongly agree
 Agree
 Neutral
 Strongly disagree

8. Do you think are there any benefits to be derived from the implementation
of Cost Control and Cost Reduction in an organization?

 Yes
 No
 Maybe
9. Do you think Cost Control and Cost Reduction scheme affect the quality
of the product of the company?
 Yes
 No
 Maybe
10. Do you agree that effective cost reduction and cost reduction program
have a significant impact on the profitability and growth of manufacturing
company?

 Yes
 No
 Maybe

11. Is there any possible means of installing a cost reduction and cost control
systems so as to reduce or eliminate wastages and enhance the profitability
of manufacturing company?

 Yes
 No
 Maybe

12. Do you think that cost control and cost reduction help to the
management of manufacturing firms towards the achievement of its ultimate
goal-profit maximization?
 Yes
 No
 Maybe

13. Does the manufacturing company able to measure its performance by the
use of cost control and cost reduction techniques?

 Yes
 No
 Maybe
14. The cost management practice of cost reduction and control tools and
techniques applied in this organization reduces the cost of products without
affecting the quality of the products?

 Yes
 No
 Maybe

15. Has cost reduction and cost control program provided any benefit to your
company?

 Yes
 No
 Maybe