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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Cost control is the practice of managing and /or reducing business expenses. Cost control starts by the business identifying what their cost are and evaluate whether those cost are reasonable and affordable, thereafter if necessary, they can look for ways to cut costs through methods such as cutting back, moving to a less expensive plan or changing services providers. To be profitable companies must not only earn revenues, but also control costs. If the costs are too high, profit margin will be low making it difficult for a company to succeed against its competitors. Brumbaug (2008) was of the opinion that companies should watch the cost and the profit will take of itself.

Cost control in an integral part of any business venture.  No firm will stay in the business if it does not employ prudent means of checking its costs by ensuring that they don’t over surpass the estimated costs projections.  If costs are not checked properly the outcome can be negative to smooth running of the business. Hamilton and Martha (2007) opined that for cost control purpose a budget provides standard cost. Company management must match budgeted and actual costs and strive to ensure that they always remain within the estimated projections.

Many organizations have strived to ensure that its core objective is to maximize profits and minimize cost.  It is precisely the assumption that the manufacturing industry like many other industry players have initiated cost control measures to ensure it operate in a cheaper and more efficient manner without compromising on quality service delivery and therefore  Costs must be controlled by all means possible to achieve the needed output and increase revenues.

In today’s competitive world manufacturing companies are struggling to maintain profit. Cost of inputs, fuel and human resource is rising each year. These developments have prompted people to look for cost reduction ideas and methods. Those who have opted for cost control measures or strategies have survives those who could not manage have failed to keep up. In recent economic down turn it becomes important to make cost control practices a major initiative in the industry. Company are finding it difficult to retain people and are laying off people which is unprecedented in recent history of industry recession .Companies have to develop its  own cost control practices for saving without cutting jobs.

The implication is that cost should be controlled rather than embarking on unscientific cost control that may translate to lowering the quality of service provision. Management is normally forced to adopt practices to regulate (control) rather than reducing cost. Cost increases as various production activities are embarked upon, the need to keep up cost in check arises because standards for production will be set and actual proportion will be made thereby bringing about variances which can only be reduced or eliminated through effective cost control. Sikka (2003) was of the opinion that cost control practices consist of methods, policies, procedures and systems that helps to regulate  the cost of operating and ensure that cost do not go beyond a certain level.

Profitability has never ceased to be the primary objective of manufacturing companies. Since the post war renaissance, Manufacturing companies prospects of obtaining a competitive advantage is by providing services at the minimal cost above others in the industry yet maintaining quality. However, this is no single measure of high profit as management and reduction of necessary expenses and cost in all functional units not only lead to high profits, but visible and evidential profits  of the company. Therefore management and control of activities help set enterprises strategies and to be determine an accurate product or service cost, improves business processes, eliminate waste, identify cost drivers and plan operations thereby leading to a remarkable profits.

This proposal deals with researching how costs at Jihan Freighters Limited can be systematically controlled and reduced with the aim of increasing profitability. The research of this paper is placed against the background of the cost control and reduction practices of the manufacturing market in Mombasa. Jihan freighters Limited was initially known as Jihan Manufacturingers is one of the key player in the manufacturing industry established in 1993.  At the inception, the core business was general manufacturing of goods between Mombasa and Nairobi with only two small canters supported by constant sub-contracting of vehicles from other people. The company pride itself and evolved to become one of the major players in the manufacturing industry across the country  and as the leading logistic provider specializing in general manufacturing, Clearing and Forwarding, shipping and warehousing with over six braches namely Mombasa,Nairobi,Kisumu.Malindi,Eldoret and most recent Nakuru  with a fleet of over seventy trucks and still subcontracting more trucks for efficient service delivery.

1.2     STATEMENT OF PROBLEM

Two inter-related function of modern-day manager are; planning and controlling. Management must not only ensure that adequate plan of cost is made at the beginning of a period but adequate arrangements are put in place to ensure periodic measurements of performance and the institution of the control factors to check noticeable deviation from standard or set objectives. 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 Endeavour, whose purpose is to maximize profit.

Manufacturing firms are faced with the problem of how to embark on cost and their effectiveness. Moreover, the problem of inefficiency under the utilization of resources which has tremendous effect on our economy should be taken into full consideration. Ubeku (1983) said that “resources are not well managed in our economy”.

The main problem organization are facing is the inability to make enough profit and achieve high performance due to the in ability to reduce and control cost. Companies are unable to install the appropriate cost reduction and control techniques in the business. It follows that it is essential to monitor the cost of producing. So how then can cost control and reduction be effectively applied in n organization to help management attain its goal? According to Adeniyi (2009), he said that “cost reduction campaigns are often introduced at a rush, desperate measure instead of a carefully organized, well throughout exercise”. That is to say that cost reduction techniques which might be adopted by a company may not yield positive result because such technique were introduced at a rush and not analyzed properly.

1.3     OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effect of cost reduction and control technique on the performance of firms in Nigeria. The specific objectives are:

i.  To investigate if the cost reduction and control of manufacturing firms has effect on their performance.

ii.  To find out whether the cost of sales has effect on the performances of manufacturing firms.

iii.  To ascertain if selling and distribution cost has effect on the performances of manufacturing firms.

iv.  To find out whether administrative cost has effect on the performance of manufacturing firms.

1.4   RESEARCH QUESTIONS

This study for effect of cost reduction and control has the following question to help achieve the stated objective;

i.  Do cost reduction and control have effect on the performance of manufacturing firms?

ii.  Do costs of sales have effect on the performance of manufacturing firms?

iii.  Do selling and distribution cost has effect on performance of manufacturing firms? 

iv.  Do administrative costs have effect on the performance of manufacturing firms?

1.5     RESEARCH HYPOTHESES

This study for the purpose of effect of cost reduction and control will test the following null hypothesis (Ho) and alternative hypothesis (H1);

HYPOTHESIS 1

Ho:   There is no significant relationship between cost of sales and performance of manufacturing firms in Nigeria.

H1:   There is a significant relationship between cost of sales and performance of manufacturing firms in Nigeria.

HYPOTHESIS 2

Ho:   There is no significant relationship between selling and distribution cost and performance of manufacturing firms in Nigeria.

H1:   There is a significant relationship between selling and distribution cost and performance of manufacturing firms in Nigeria.

HYPOTHESIS 3

Ho: There is no significant relationship between administrative cost and performance manufacturing of firms in Nigeria.

H1: There is a significant relationship between administrative cost and performance of manufacturing firms in Nigeria.

1.5   THE SCOPE OF THE STUDY

This study is on the effect of cost reduction and control techniques on the performance of manufacturing firms in Nigeria.

1.6   SIGNIFICANCE OF THE STUDY

The significance of the research is to help the organization come up prudent cost control measures to maximize profits

To the Management

The case study may be of absolute importance to the organization if the recommendation contained is adopted for implementation.  The recommendation may help the organization overcome some of its operational and management problems.

To the Researcher

The researcher stands to benefit from this research in two ways.  It is a prerequisite towards the attainment of undergraduate degree.  It may also propel the researcher to a better height should the organization adopt the contents and recommendation.

To future researchers

It may come in handy as a secondary data source for future researchers.

1.7   LIMITATION OF THE STUDY

Duration of the study

The time allocated for the study was only three months, which forced the researcher to work around the clock to exhaustively finish the research study

Finance

This kind of research demanded that the researcher have enough funds to fulfill various requirements.  The researcher faced financial constraints since the institution did not provide any finance assistance.

Responses

Since this study touches on the epicenter of employees’ plight and employment status as well some shortcoming of the employer, it may be deemed critical and the beneficiaries of the status quo may shun it by failing to adopt it.

1.8   DEFINITION OF TERMS

Cost control: means keeping costs within presented limits

Cost Reduction: An attempt to bring costs down from a previously accepted level.

Practices: Actual application or use of an idea, belief, or method, as opposed to theories relating to it.

Profitability: Its state or condition of yielding a financial profit or gain. It is often measured by price to earnings ratio.

Management:  To coordinate the efforts of people to accomplish goals and objectives using available resources efficiently.

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