The Appraisal of The impact of effective cost minimization measures on the growth and

profitability of manufacturing firms in Nigeria.

CHAPTER ONE

1.1 BACKGROUND TO THE STUDY

The primary aim of every business is to make maximum profits and minimize cost. In order to

achieve the basic objective most firms especially those that engage in manufacturing activities

struggle hard to carry out smooth and successful production and sales operations.

There are numerous factors that hinder firms from the realization of their profit motives. Such

hindrances include; the enormously large rate of inflation, depreciating value of Naira, low

capacity utilization and intense competition. As a result of the Afore-mentioned, many firms

struggle to maintain satisfactory earnings in a situation where costs are rising but price increases

are becoming more and more difficult to achieve.

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As a way of stemming the rate of economic activity and in order to maintain improved profitability

and remain afloat in business, many manufacturing firms in Nigeria now adopt one measure as the

other aimed at controlling their cost or better still reducing such costs as a result of efficiency of

operations leading to enhanced growth and probability which will in turn help to maximize the

wealth of shareholders. These measures includes: sourcing and developing row materials locally

instead of importing them, obtaining quantity discount through bulk purchase and using cost

minimization strategies such as work-study to improve labour efficiency, Just-In-Time (JIT) to

eliminate waste and Advanced Manufacturing Technology (AMT) which uses the best technology

to achieve high quality standard.

1.2 STATEMENT OF PROBLEM

Manufacturing firms in Nigeria now operate with in a turbulent business environment which has

been characterized by high rate of inflation, intense competition by capacity utilization,

depreciation and depreciation value of Naira, etc. As a result of the afore mentioned, many firms

struggle to maintain satisfactory earnings in a situation where costs are rising but price increases

are becoming more and more difficult to achieve.

The economic woes have so much negative impact on the operations of these firms that many of

them are now engulfed in the ugly trap of profit squeeze with some of them on path of demise.

1.3 OBJECTIVES OF THE STUDY:

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The general objective of the study is to appraise the impact of effective cost minimization measures

on the growth and profitability of manufacturing firms in Nigeria.

The specific objectives are as follows;

1. To determine the relationship between effective cost minimization measures and growth

of Nigerian manufacturing firms.

2. To ascertain the accounting systems which are designed to control costs.

3. To ascertain the areas where costs may be reduced

4. To establish if there is a significant difference in material, labour and overhead costs of

manufacturing firms in Nigeria.

1.4 SIGNIFICANCE OF THE STUDY

Against the backdrop of high rate of inflation, depreciating and depletion value of the naira

and turbulent business climate, many manufacturing firms now adopt strong measures

which are society and developing raw-materials locally instead of importing them,

obtaining quantity discount through bulk purchase, etc. so as to reduce costs, climate waste

and inefficiency in order to increase productivity and maintain satisfactory earnings to help

them remain afloat in business. In this regards, the results of the research study will no

doubt help the entire society to purchase any product as a result in the increase in

productivity made by manufacturing firms and also help institution through the lecturers

to their student to impact knowledge on how to obtain quantity discount through bulk

purchase and also tell the students to source raw-material locally instead of importing them.

3
 The research study will add to the pool of knowledge and help to instill cost consciousness

amongst manufacturing firms in Nigeria and identify the cost control systems and cost

minimization tools that suit the organization such that they qill no longer claim ignorance

or be left in the dark.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

The scope of this research study is limited to Nigerian Bottling Company (NBC) PLC.

However, the limitations incumbent in the study are as follows:

1. Time: - This is the first limitation that affected the research study badly because carrying

out the study requires time and one can’t afford to miss lecture and embark on a journey to

the cost study.

2. Finance: - It is another limitation because the study requires enough funds to carry out the

research and without the funds the study will not be fruition.

3. Exeat: - Getting permit to visit the case study may pose another limitation because before

you find the supervisor to endorse and move down to the authority for approval may not

easy on the study.

4. Uncooperative staff: - Sometimes one may found some of the staff at the Nigerian

Bottling Company very uncooperative and some even refused to accept my questionnaire

and those that accepted, some of them did not summit back their questionnaire.

1.6 RESEARCH QUESTIONS AND HYPOTHESES

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1.6.1 RESEARCH QUESTIONS

This study seeks to answer the thought provoking questions outlined below:

1. What is the impact of effective cost minimization measures on the growth and profitability,

of Nigerian manufacturing firms?

2. What are the differences in material, labour and offer embarking on cost minimization

strategies?

3. What are the accounting systems designed to control costs?

4. What are the applicable areas in which costs maybe reduced?

5. What is the relationship between effective cost minimization strategies and growth and

profitability of manufacturing firms in Nigeria.

1.6.2 RESEARCH HYPOTHESES

The following hypotheses were formulated to guide the research study:

H1: There is significant impact of effective cost minimization measures on the growth and

profitability of Nigerian manufacturing firms.

H0: There is no significant impact of effective cost minimization measures on the growth and

profitability of Nigerian manufacturing firms.

H1: There is significant difference in various elements of cost before and after embarking on

cost minimization strategies.

H0: There is no significant difference in various elements of cost before and after embarking

on cost minimization strategies.

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1.7 DEFINITION OF TERMS

Advanced Manufacturing Technology (AMT): this helps organizations to be innovative and

flexible and able to deal with short product life cycles. It is therefore a new approach designed to

offer greater product variety whilst maintaining/reducing costs of production and wastes.

Budgetary control: This is “the establishment of budgets relating the responsibilities of

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

results either to secure by individual action the objective of that policy or to provide a basic for its

revision” (CIMA).

Cost control: means keeping costs within presented limits

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

Investment Centre: A Centre where managers are not only accountable for sales revenue and

expenses but also responsible for capital investment decisions.

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Just-In-Time (JIT): A manufacturing system that reduces the time that products spend in the

production process by eliminating waste.

Value Analysis: A cost reduction technique which attempts to reduce the manufacturing cost of a

product with reducing its quality performance or value to the customer (ICAN Pathfinder, 2005).

Work Study: A scientific techniques method of determining the most efficient method of using

labour, material and machinery.

1.8 HISTORICAL BACKGROUND OF THE CASE STUDY

NIGERIAN BOTTLING COMPANY PLC (NBC PLC)

This study will examine the impact of effective cost minimization measures on the growth and

profitability of manufacturing firms in Nigeria using the Nigerian bottling company (NBC) Plc as

a case study. The company was formed in 1951; it started bottling operations in 1953 as a

subsidiary of A.G. events Plc. The Nigerian Bottling Company is the sale of bottler of Coca-Cola

in Nigeria. The Nigerian Bottling Company produces and sells coke, Fanta, sprite, Eva water and

five alive and has remained the market leader in the food and beverage sector with the focus on

training, developing and retraining it’s people. As the Beverage Industry is experiencing intense

competition with new entrants, new bands and new packages being introduced, the company’s

focus in its strategic plan is to grow volume, profit and ensure that it’s return on investment out-

weights it’s cost of capital.

Coca-Cola first came into Nigeria in 1983 when Nigeria Bottling Company set up its first plant in

Lagos. Nigeria Bottling Company PLC is today one of the Nigeria’s number one bottlers of soft

7
drinks selling more than six million bottles per day, a figure which is still growing with the

continuing expansion of the existing 12 plants with opening of brand new plant in part of the

federation. Our goal is to be the best in all that we do.

REFERENCES

Asika N., (1991), Research Methodology in the Behavioural Science,

Longman Plc, Nigeria. pp 1-35

Catherine S.W., (2009) Essentials of Cost Management

Kohler’s Dictionary for Accountants, 6th ed. (Englewood Cliffs,

NJ: Prentice-Hall College Division, 1990), 528–529.

Robert S. Kaplan and Robin Cooper, (1998), Cost & Effect: Using

Integrated Cost Systems to Drive Profitability and Performance

(Boston: Harvard Business School Press, 1998), viii–ix., Pp 24–27.

McNair C. J., “Defining and Shaping the Future of Cost

Management,” Journal of Cost Management 14, no. 5 (2000):Pp 32.

Brian M. (1996), Making the Numbers Count: The Accountant as

Change Agent on the World-Class Team, (Portland: Productivity

8
 Press, 1996): Pp 17,3.

John O. R. Etal, (2011), Profitability and Cost Management in Healthcare

Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores,

CA 94065 U.S.A.

Noah A. O., (2009), Organisational Efficiency of Cost Control in Service

Industry. Department of Accounting and Finance,

University of Ilorin, Nigeria.

9
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 INTRODUCTION

All executives and managers account for cost. In various ways, all business professionals manage
cost, and most managers engage in capital investment decisions, forecasting, pricing, and product
or service management. All these business activities are deeply embedded in the work of cost
accounting. Cost-related tasks consume a significant amount of management time at all levels of
the organization. A business professional must understand the organization’s cost accounting
practices to competently manage a specified area and understand how personal accountabilities
are calculated and tracked (Wiley, 2000).

Increased competition in the marketplace, combined with increasing products costs, have forced
manufacturers to place a premium on managing administrative expenses. With evolving

10
complexity of products offerings, understanding products line and market segments costs become
essential information for managing the business.

Profitability and cost management is integral to many areas business operations.

This section of the study seeks to review topics and concepts of interest for the understanding of
the research topic. These ranges from; costs management system, cost control, activity based
costing (ABC), companies’ profitability (performance measurement) and other costing related
issues are discussed.

2.1 COST MANAGEMENT

The term of ‘cost management’ is not a well defined term. It builds on both cost accounting and
management accounting, but goes beyond the two (P.Agrawal and mehra 1998). (Brinker 1996)
defines it as a set of techniques and methods for controlling and improving a company’s activities
and processes, its products and services. In addition, Maskel (2009) described that cost and
management accounting is used internally to help the company’s manager control and improve the
business. Although there is an accounting standards associated with these tasks, there is no legal
requirement to perform these tasks in any particular way or to perform them at all. A company can
do as much or as little cost and management accounting as it wishes and it can be done in any way
it wants. Furthermore, cost accounting practices are seldom exactly similar in different companies
(P. Agrawal and mehra 1998).

Whereas, Anthony (1989) mentioned that management accounting is different from cost
accounting as the latter was then taught in two fundamental ways. Cost accounting texts dealt
entirely with numbers, while management accounting recognizes that human beings use the
numbers (accounting information) and the objectives are to assist managers and to influence their
behaviour. One criterion is “goal congruence” – inducing managers to act in such a way that while
achieving their personal goals they also help to achieve the goals of the organization. Management
accounting teaches the behavioural factors in the budget process, i.e. participative budgeting,

11
personal responsibility, controllability, engineered costs versus discretionary costs, the approved
budget as a bilateral commitment, tight and loose budgets, and acting on variances under various
circumstances. Its theme is “different cost construction for different purposes” and it deals with
nonmonetary information as well as dollar amounts, and future estimates as well as historical data
(Anthony 1989).

All these definitions from these four research papers have given a basis and a guideline in terms
of the subject area when searching for relevant sources of references for this paper. There is a
confusing of overlapping terminology and meanings within the cost management literature. The
lack of a universal area and definition of cost management is in part due to the way the concept of
cost management has been practiced and the multidisciplinary origin and evolution of the concept.
In effect, as it will be explained in the following section, the concept of cost management has been
considered from different points of view in different bodies of literature. All the relevant sources
of references in the subject area of cost management, cost accounting and management accounting
have been used to further develop this literature review paper. As a consequence, many labels can
be found in the literature review referring to cost management as a result of some of the contrasting
approaches to cost management existing in the literature.

2.2 THE COST MANAGEMENT LANDSCAPE

In providing the topology of cost management, the issues discussed in this section started with the
most primitive issues about cost management moving on to the current issues in 2009. In 1984,
the present era of intense global competition is leading U.S. companies toward a renewed
commitment to excellence in manufacturing. Attention to the quality of products and processes,
the level of inventories, and the improvement of work-force policies has made manufacturing once
again a key element in the strategies of companies intending to be world-class competitors.
However, there remains, a major-and largely unnoticed obstacle to the lasting success of this
revolution in the organization and technology of manufacturing operations. As noticed by Kaplan
(1984), most companies are still using the same cost accounting and management control systems
that were developed decades ago for a competitive environment drastically different from that of

12
today. He added further, poorly designed or outdated accounting and control systems can distort
the manufacturing performance.

Furthermore, Kaplan (1984) highlighted that it is unlikely that any cost accounting system can
adequately summarize a company’s manufacturing operations. He added that today’s accounting
systems evolved from the scientific management movement in the early part of the twentieth
century where they were instrumental in promoting the efficiency of mass production enterprises,
particularly those producing relatively few standard products with high direct labor content.
Reliance on these systems in today’s competitive environment, which is characterized by products
with much lower direct labor content, will provide an inadequate picture of manufacturing
efficiency and effectiveness (Kaplan 1984). Kaplan (1984) stated that measurement systems for
today’s manufacturing operations must consider quality, inventory, productivity, innovation and
work force. In summary, the financial measures generated by traditional cost accounting systems
provide an inadequate summary of a company’s manufacturing operations. Today’s global
competition requires that a nonfinancial measure such as mentioned before to be used in the
evaluation of a company’s manufacturing performance. Companies that achieve satisfactory
financial performance but show stagnant or deteriorating performance on nonfinancial indicators
are unlikely to become or long remain world-class competitors.

Present cost accounting and management control systems rest on concepts developed almost a
century ago when the nature of competition and the demands for internal information were very
different from what they are today. When companies now make arbitrary allocations of corporate
expenses to divisions and products, accounting systems may provide even less valid cost data than
did the cost accumulation systems in use 50 years ago. In general, though, an accounting model
derived for the efficient production of a few standardized products with high direct labor content,
it will not be appropriate for an automated production environment where the critical success
factors are quality, flexibility and the efficient use of expensive information workers and capital
(Kaplan 1984).

In addition, Kaplan (1984) mentioned that it is doubtful whether any company can be successfully
run by the numbers, but certainly the numbers being generated by today’s systems provide little
basis for managerial decisions and control. Managers require both improved financial numbers
and nonfinancial indicators of manufacturing performance because no measurement system,

13
however well designed, can capture all the relevant information, any operational system must be
supplemented by direct observation in the field. Accounting and financial executives must redirect
their energies, and their thinking, from external reporting to the more effective management of
their companies’ tangible and intangible assets. Yesterday’s internal costing and control practices
cannot be allowed to exist in isolation from a company’s manufacturing environment if the
company wishes to flourish as a world class competitor.

In 1987, (Kaplan and Johnson 1987) emphasize that management accountants have been criticized
for their inability to innovate and these perceptions continue to persist in light of the relatively low
success rate in implementing ‘new’ management accounting innovations such as ABC and the
balanced scorecard (Cobb, Innes et al. 1992). In 1988, it is testified that back then, the costs of
direct labor and materials which is the most important production factors could be traced easily to
individual products. Distortions from allocating factory and corporate overhead by burden rates
on direct labor were minor and the expense of collecting and processing data made it hard to justify
more sophisticated allocation of these and other indirect costs. Today, product lines and marketing
channels have proliferated. Direct labor now represents a small fraction of corporate costs, while
expenses covering factory support operations, marketing, distribution, engineering, and other
overhead functions have exploded, but most companies still allocate these rising overhead and
support cost by their diminishing direct labor base or, as with marketing and distribution costs, not
at all. These simplistic approaches are no longer justifiable, especially given the plummeting costs
of information technology. They can also be dangerous. Intensified global competition and
radically new production technologies have made accurate product cost information crucial to
competitive success (Cooper and Kaplan 1988).

Until recently little was known about the current state of management accounting practice, where
(Anthony 1989) stated that information about management accounting practices is abysmally poor
and that almost all information is anecdotal. However, much progress has been made in research
and the teaching of management accounting during the past 20 years (Horngren 1989). Although
the foundation was laid in the nineteenth century, management accounting as a formal subject in
the curriculum dates only back to the 1950s. Thereafter, new ways of thinking about the topic and
new techniques for applying the basic ideas have been developed (Anthony 1989). Although
changes are taking place, firms to a large extent, continue to rely on outmoded accounting methods

14
(Bright, Davies et al. 1992). Similar findings were also reported in other surveys in the United
Kingdom where it is reported that a significant lag still exists between innovations in
manufacturing and innovations in management accounting. This lack of innovation was also
described by (Kaplan 1986) as ‘accounting lag’ that needs to be minimized in order to keep
management accounting relevant to the changing information needs of managers.

2.3.1 THE PROFIT IMPERATIVE: DEFINING THE OBJECTIVES OF COST

MANAGEMENT

Profitability, variously interpreted as net income, equity value, and return on investment is a
results-focused indicator watched more carefully than any other performance measurement
category. But if these measurements depict results, what measurements show the dimensions of
performance for the processes that lead to those results? At the core, profit has only two
components: revenue and cost. To understand how a cost management system works, here are
some key terms to be familiar with:

2.3.2 COST CONCEPTS

 Cost: An outflow of a resource, whether in cash, as a payable, a rendered service, or as a

trade or barter, that is consciously made with expectation of benefit to the organization:
goods, property, or services acquired.
 Cost accounting. The accounting profession is divided into two major branches: (1)
financial and (2) management (or managerial) accounting. The later is synonymous with
cost accounting. The term “management” refers to the comparatively internal focus of the
cost accounting field as compared with the external focus of financial accounting. The
word “traditional,” when used to describe cost accounting methods, refers to the standard
practices that are taught in basic management accounting courses and practiced in most
North American firms. The standard practices include cost systems and procedures,
methods of determining costs, points of cost accountability, forecasts, cost comparisons
(e.g., standard cost systems), and budgets (operational, project, and capital). The purpose

15
 of cost accounting is to assist in the wise and prudent stewardship of overall organizational
resources.
 Cost and expense distinctions. Both costs and expenses are expenditures. For the remainder
of this book, the word “expenditures” will be used to identify an organization’s total
outflow of assets in all forms. In the standard income statement of a for-profit firm, costs
typically refer to the categories of material, labor, and overhead appearing above the
income statement’s gross margin line (revenue minus cost). See Exhibit 1.1 for an example
of the income statement components for a manufacturing firm. Expenditures typically
called operating expenses are displayed below the gross margin line. On the income
statement, the material, labor, and overhead items are called cost of goods sold (COGS).
Operating expenses consist of monetary or asset outlays for general, administrative, selling,
marketing, and other functions deemed to be indirectly related to production. Operating
expenses are commonly abbreviated as SG&A for sales, general and administrative.
 Cost management. The use of cost accounting systems and methods to guide current and
future operations toward specified objectives; the analysis and interpretation of cost data is
critical to the decision-making process.
 Cost management system (CMS). An expenditure information architecture that tracks,
monitors, reports, and provides decision quality information and insights. A CMS is less
constrained by exacting professional standards and reporting formats than financial
accounting; therefore, a CMS can and should be customized to match an organization’s
internal environment and specific cost structures. A CMS sets direction for resource
consumption priorities and makes course corrections by emphasizing operations first and
accounting practices second. A CMS specifically answers the demands of the profit
imperative when it aligns employee spending behaviors with the organizational strategy.
The purpose of the CMS is to understand the nature and behavior of cost, and thereby
manage valuable assets wisely through optimizing limited resources. The chief CMS
responsibility is to promote improvement in cost structure. The CMS should:
• Support understanding of the nature and behavior of cost (and the humans doing the
spending).
• Promote, track, and give feedback on value creation and continuous improvement.
• Assist management in wise use of resources.

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  Cost types. Management accountants created cost types in an attempt to understand the
nature and behavior of different resources. Cost types are designations given to categories
of resource expenditures. They are based on assumptions about the ways that resources are
consumed in relation to the activities to which they are applied. They are also based on the
purposes for which the resources are used. Some traditional cost types include:
 Fixed. Costs assumed not to vary with production/service unit volume.
 Variable Costs: assumed to vary with production/service unit volume.
 Semi-fixed/variable, also called step-fixed/variable. Costs that vary at incremental volume
levels.
 Direct Costs: that can be clearly linked, and therefore assigned to, specific product/service
units.
 Indirect Costs: that cannot easily be linked to specific product/service units, and therefore,
must be allocated to production/services based on a selected cost driver.

2.3.3 VALUE
When accountants talk about value they refer to “any preferred object or interest therein”; and
accounting valuation is “a judgment expressing or implying preference, or relative approval or
disapproval.” Organizations exist to become the provider of preference by conveying value to
customers, clients, and constituents. This is as true of a spiritual organization with a humanitarian
mission as it is of a large corporation focused chiefly on shareholder wealth.
The path to value is different for each organization, and value has
many definitions beyond those of the accountant. In the last half of the twentieth century, the focus
on value became rooted in the idea of creating shareholder value. What do customers, shareholders
and employees value? What do they really want? How can we differentiate ourselves from the
competitor in terms of value? Should we be as concerned about internal constituents (i.e.,
employees) as we are about customers and shareholders? How do all the converging interests of
those with a stake in the organization’s success or failure work together to create a mutually
satisfying sense of value?
None of these questions has an easy answer, but one fact is certain:

17
The first and most common cause of enterprise failure is, simply, overspending— a basic failure
to manage expenditures flowing out and revenues flowing in. The solution to overspending
behaviors involves little more than the skill set required to balance a checkbook. Creating value
for the complex organization requires clear cost management objectives embedded in a cost
management system.

2.4 COST MANAGEMENT OBJECTIVES

Nearly all business professionals know the major components of a general ledger (G/L) system, or
at least two of the important reports generated by it: the income statement and the balance sheet.
Far fewer managers can describe a cost management system—and with good reason. An effective
CMS is customized to match an organization’s internal environment and specific cost structures.
While an experienced financial professional, and many managers, can move from company to
company and quickly understand the financial statements of each, even practiced accountants need
considerably more time to understand the intricacies of different cost management systems from
company to company. A CMS is less constrained by exacting professional standards and reporting
formats than are financial systems, with a few exceptions like the regulated cost guidelines of
government contractors.
Importantly, the CMS sets direction for resource consumption priorities and makes course
corrections by emphasizing operations first and accounting practices second. A CMS specifically
answers the demands of the profit imperative by aligning employee spending behaviors with the
organizational strategy.

2.5 COST MANAGEMENT SYSTEM MODEL

This study acknowledges and borrows from the approach used by Robert S. Kaplan and Robin
Cooper in their 1998 book, Cost & Effect. Their “four-stage model of cost system evolution”
describes how a CMS typically evolves over the life cycle of a maturing organization. This study
will use their four-stage model, adapted in Exhibit 1.3, to contrast conventional and advanced cost
management systems and techniques in order to have a practical context for using the ideas
presented in this research as they apply to current practices in the organizations.

18
Stage I system is not adequate for routine reporting, it cannot hope to deliver information on
product, customer, and operations costing. Such systems offer little in support of strategic control.

Stage II systems are driven by financial reporting requirements, and they meet financial accounting
standards. However, they remain severely limited in decision- quality data. They often distort both
costs and profits, and they are not timely in delivering feedback.

Stage III systems are specialized, in that the cost and financial accounting systems use the same
databases; however, the two systems remain isolated and specialized in application. In this stage,
activity based costing (ABC) and performance measurement systems often emerge.

Stage IV systems are integrated, and present a unified reporting format supportive of operational
strategy. Financial and operations data, as well as budget and actual information, are all linked.

Organizations today remain spread across the Four-Stage spectrum. A healthy number of
companies have moved to Stage III; but, it remains rare to find a true Stage IV company, although
many claim to be. An enterprise resource planning (ERP) implementation does not guarantee a
Stage IV environment. Every executive and manager first needs to determine which stage current
accounting systems are in, and then progressively move through each stage to the integrated level,
whether by using the Kaplan/Cooper model or some other proven, logical method. Kaplan and
Cooper caution against the high failure rate of organizations that try to jump stages.

EXHIBIT 1

Four-Stage Model of Cost System Development

Stage One of the model Stage Two of the model

 Broken accounting and cost systems  Driven by financial reporting

 Many errors with large variances
 Inadequate external reporting
 Inadequate product, service, and
customer cost information
 Inadequate operational and strategic
control
 Meets audit standards
 External reports tailored to financial
reporting needs
 Inaccurate and hidden product, service
and customer costs
 Strategic feedback limited and delayed

Stage Three of the model Stage Four of the model

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  Specialized accounting and cost  Integrated accounting systems
systems  Fully linked database
 Shared database but stand-alone  Financial reporting systems create
system with informal linkages external reports
 Same as stage two  Product, service, and customer costs
 Product, service, and customer costs in integrated in ABM systems
separate ABM system  Strategic/operational control within an
 Strategic/operational control with integrated performance measurement
several separate performance system
measurement system

Adapted from Robert S. Kaplan and Robin Cooper, Cost and Effect: Using Integrated Cost Systems to Drive
Profitability and Performance (Boston: Harvard Business School Press, 1998)

2.6 OPERATIONS AS A PRIMARY FOCUS OF CMS

The primary focuses of an effective CMS are operations and the support of management decision
making. In addition to routine bookkeeping, the CMS objectives include, but are not limited, to
ten characteristics. A CMS that supports decision making must:

1. Display past, present, and future expenditures.

2. Mirror the organization’s cost structure and behaviors to support ongoing improvement
and control.
3. Support realistic, reliable strategic planning and explicit management intention.
4. Influence individual and team behaviors toward goal accomplishment.
5. Monitor and control resource use against mission and strategic intentions.
6. Provide warning when unhealthy financial thresholds are imminent.
7. Facilitate the repositioning of resources.
8. Hold specific individuals and groups accountable for standards of performance.
9. Assist in analyzing key discrete points of profitability: customer, process, product, and
region.
10. Display a 360-degree unbiased view of the organization’s cost structure, one that is
understood and actually used in decision making by all executives and managers.

20
2.6.1 Display Past, Present, And Future Expenditures

This characteristic means that historical, current, and prospective (i.e., forecast, simulation)
expenditure data are accessible, timely, and accurate. Accessibility is primarily judged on ease of
use. In other words, can nonfinancial managers make use of the system’s data and information?
Accuracy is based on compliance with cost system design and with data-gathering integrity.
Timeliness is based on proximity to real-time information. In the Kaplan/Cooper four-stage model,
Stage I systems frequently fail all these criteria and almost never address future expenditures
except in budgetary terms. Stage II systems are more reliable for past and present data but often
fall short in accessibility and timeliness. Only in Stage III do CMS designs begin to fulfill all
criteria. Obviously, if executives work with less than the full timeline (i.e., past, present, and
future), their focus will most often be on historical data, while current and future cost conditions
elude them.

2.6.2 Mirror The Organization’s Cost Structure And Behaviors To Support Ongoing
Improvement And Control

The CMS design must serve operations and management decision making first, and bookkeeping
second. An effective cost system will endeavors to clearly exhibit the sources, movement, use, and
funding of organizational resources. The system must reflect how resources are actually used and
how resource use aligns with or deviates from management intentions and plans. In the
Kaplan/Cooper model, only Stages III and IV possess these attributes.

2.6.3 Support Realistic, Reliable Strategic Planning And Explicit Management Intention

In practice, profit generation has only two components: revenue/sales and expenditures (i.e., costs,
expenses). Therefore, when planning for profitability (or breakeven) CMS information that fairly
and accurately represents expenditure information promotes realistic planning and achievement
targets. Again, only Stage III and IV cost management systems possess these attributes.

2.6.4 Influence Individual and Team Behaviors toward Goal Accomplishment.

This attribute is among the most important for a CMS. If people do not find the cost system relevant
to their daily activities and long-term responsibilities, they will not use it. Relevance includes
accountability for predetermined performance standards, the prudent management of resources,
and visibility of companywide cost structures and behaviors. A Stage III CMS provides
opportunity for achieving this desired criterion; however, only Stage IV provides the level of
integration needed to maximize this goal.

2.6.5 Monitor and Control Resource Use against Mission and Strategic Intentions.

21
This means that the cost management system assists in aligning and allocating resources where
they will best serve management’s strategic intentions. The managers of organizations in Stages I
and II of the Kaplan/Cooper model overlook this characteristic when designing the CMS, if they
give any thought to system design at all. When different managers perform budgeting and strategic
planning processes at different times, the compartmentalization undermines strategic
achievements that depend on appropriate resource alignment. Imagine an executive team energized
from a strategic planning retreat returning to day-to-day operations, issuing mandates, directives,
and a trainload of new projects, all without addressing resource allocation, budgets, or realignment
of people, time, and facilities. This is a strategic plan scenario doomed to frustration and failure.

2.6.6. Provide Warning When Unhealthy Financial Thresholds Are Imminent.

A thoughtfully designed CMS provides an early-warning system that identifies and averts
overspending. It may also signal the need for additional resources due to volume and/or
environmental changes. Often, CMS Stages I and II provide reactive reporting long after a decision
opportunity for changing an operational process issue has passed. Imagine the frustration of a
manufacturing manager who is held accountable for subpar performance in material and labor
efficiencies, but who receives efficiency reports two to four weeks after the “damage” is done.
Only Stage III and IV organizations rectify these demoralizing dynamics.

2.6.7 Facilitate the Repositioning of Resources.

This CMS characteristic partners with number 6 by overseeing the movement and realignment of
resources to adapt to strategic changes. In many companies, once an annual budget is set, woe to
the manager who overspends it. If the strategic plan and the budget live separate lives, how can
managers be expected to satisfy both?

2.6.8 Hold Specific Individuals and Groups Accountable for Standards of Performance.

A recurring error in strategic planning is the failure to assign responsibility for action plans and
performance targets. When set up properly, the CMS signals expectations for cost targets and
identifies the individuals/groups responsible for meeting those targets. The CMS links cost targets
with appropriate nonfinancial measures that discourage managers from working on cost and
financial performance in isolation from other important indicators.

2.6.9 Assist in Analyzing Discrete Points of Profitability: Customer, Process, Product, and
Region.

A financial accounting system provides an aggregate consolidated view of profitability. An

effective CMS provides an analytical extension that searches for suspected areas of
underperformance related to specific customers, product lines, market sectors, and other
identifiable objects of analysis. Although a Stage II CMS may provide rudimentary historical data

22
on these targets of analysis, only Stage III and IV systems provide decision-quality reporting
through use of such techniques as activity-based costing (see next section).

2.6.10 Display a 360-Degree Unbiased View of the Organization’s Cost Structure

This is understood and actually used in decision-making by all executives and managers. A CMS
that provides open-book views of company-wide cost structures used concurrently by all managers
to advance the organizational community’s well-being as a whole and encourages management
creativity in resource use, as well as optimal use of available capacity. In most cases, only a Stage
IV CMS can satisfy this attribute requirement.

To be an effective management decision-making guide, the cost management system has to be

much more than a set of bookkeeping procedures, and it must not be the sole source of information
for decision making. Never use a cost management system in isolation for operational decision
making. Just as financial accounting delivers an important but narrow stream of results
information, cost accounting also displays a critical but incomplete viewpoint. Nonfinancial, non-
cost information is part of any mature cost analysis. This is particularly true for making business
development decisions. For example, a research and development (R&D) function usually shows
continuous losses when subjected to a profit-and-loss, P&L (i.e., income statement), approach.
However, the R&D function value remains invisible until seen in the context of potential future
revenue and cost streams.

2.7 COSTS CONTROL

Cost control is the regulation of the cost of operating a business and is concerned with keeping
cost within acceptable limits; the limit will usually be specified as a standard cost in a formal
operational plan or budget. If the actual cost differ from planned cost by an excessive amount, cost
control action will be necessary (Ayinde, 1999).

2.8 COST CONTROL AND PROFITABILITY

Every business professional wants to manage well by making the right decisions. Good decisions
lead to profit. Effective management and profitability rely mutually on systems that control
employee behavior. In turn, the control system receives accounting reports that detail efficiency
and profitability. Commonly, financial results are the “bottom line” of the control system of most
organizations. This is the time to distinguish cost accounting and cost management. Cost
accounting can be thought of in terms of structured data elements; cost management can be thought
of in terms of the information yielded by analyzing cost accounting data elements. As defined
earlier, cost accounting includes cost systems and procedures, methods of determining costs, points
of cost accountability, forecasts, cost comparisons (e.g., standard cost systems), and budgets

23
(operational, project, and capital). Interestingly, in many companies, these and other functionalities
exist but are not actively managed. Unless cost managers create meaning out of the cost accounting
data and reports, a good portion of cost accounting effort is wasted, and critical information for
decision making remains hidden. Significant resources can be applied to cost accounting work, but
if executives view cost accounting simply as part of financial accounting, meaning and insight
remain hidden within transaction data. Only cost management can extract and create insight and
meaning from raw cost data.

The cost accounting obligation is simple in concept: Provide accurate cost information.
Implementing a cost accounting system that is accessible, aimed at the right targets of analysis,
and supportive of management decision making is a more sophisticated task. The cost management
responsibility is equally clear: Promote improvement in cost structure. Making good on this
prospect is even more challenging.

Make no mistake, accounting is part of the organizational control system. The primary purpose of
the control system is to protect the organization’s assets. The important place that the accounting
system occupies in the overall control system becomes more intriguing upon consideration of some
basic accounting terminology. One common accounting definition of assets is “costs that have not
yet been used.” The accounting term for this is unexpired costs. These unexpired costs represent
current or future value to the organization. Controller is the title of the head accountant in many
organizations. Finally, consider that the two conventional financial statements that reflect this
control and safeguarding of assets are (1) the balance sheet, and (2) the statement of cash flows.
All this clearly speaks to the control focus in accounting activities.

The next most important function of the accounting system is to monitor profitability as recorded
on the periodic income statement. Profitability results from effective control. All managers follow
profit across the shortest available reporting interval; however, responsibility for calculating
profitability lies with financial accountants, who in turn rely heavily on cost accountants.

2.9 COST CONTROL AND PERFORMANCE MANAGEMENT SYSTEMS

At this point, it is worth making a final connection point. Since cost is such an integral element of
the “profit imperative” and profit performance is a universal organizational requirement, it is
natural and inevitable that cost and performance systems become intimately associated.

Organizations with CMS designs in Stages I and II use financial only accounting systems. If it
exists at all, nonfinancial performance measurement is typically fragmented and isolated within
the functional domains of an organization. Everyone wants to “keep score,” and without a formal
measurement system, good managers will create their own scoreboard. For example, a competent
production manager always has a control system in place based on the principles of quality, theory
of constraints, or some homegrown paradigm.

24
Companies developing into a Stage III CMS almost always navigate the same important barrier:
exclusive reliance on financial measures for management and accountability purposes. An intense
struggle ensues between the financially based management system and the more mature emerging
system that values nonfinancial measures as equally important. Consequently, this can result in
two performance management systems within the same company—the original financial-based
accountability framework and the more balanced performance information paradigm. The
subsequent conflicts are all too familiar; but, eventually, they must be resolved so that the entire
organization embraces a single performance measurement standard of accountability.

Once again, the primary responsibility of cost accounting activities is conceptually simple: Provide
accurate cost information. The cost management responsibility is equally clear: Promote
improvement in cost structure.

Cost and organizational performance are inseparable. The link between cost and performance may
seem obvious today, but not long ago financial results were the organizational report card of
choice. From a capital market perspective, the financials still reign supreme. That said, studies
reveal the same market analysts paying more and more attention to nonfinancial measurements
and intangible asset valuation, as well as to short term quarterly financial measures like earnings
per share and price/earnings ratio. Other operational frameworks, like the Quality Movement,
helped shift the emphasis to some degree. However, when, in the early 1990s, performance
measurement and management systems began developing independently from financial systems,
performance managers found a structured way to move beyond the information constraints of
general ledger financial systems. Increasingly, powerful performance management methods and
software applications support the development and reporting of nonfinancial information.

2.10 DRAWBACKS OF TRADITIONAL COST MANAGEMENT

Cost management have become subjects of increasing interest in recent years to academics and
practitioners and shortcomings of traditional cost management has received attention since the
early 1980s’based on a number of research works on this subject matters. The first set of criticisms
of managerial cost accounting is aimed at methods used to derive product costs. The main case
against current product costing practices is that they provide inaccurate estimates of product cost,
thereby failing in their function of helping management make product related decisions. The
principal arguments are:

1) Costing systems in job order production require excessive tracing of costs to individual jobs.
2) Overhead apportionment rates are too broad, covering wide bands of the operating cost
spectrum.
3) Costs that are driven by variables other than production volume are apportioned to products by
volume-based rates.

25
4) The numerator of the apportionment rate is almost always direct labor hours or direct labor cost,
even though direct labor is the driver of few overhead costs.
5) Apportionment rates generally reflect the assumption that all productive resources are expected
to operate at the same level of intensity (percentage of peak operating capacity).
6) Costs of product-related activities outside the main manufacturing or service-providing centers
– mainly R&D, marketing, selling, distribution, and warranty costs – are not identified with the
products they support.
7) Accounting textbooks have focused too strongly on short-term variable costs, overlooking the
impact of capacity costs on strategically-oriented product decisions.
(Kaplan 1984) mentioned that yesterday’s accounting undermines production and (Geri and Ronen
2005) believed that his paper was one of the first among many publications to depict the faults of
traditional cost accounting and the time was ripe for the rise of the new methodology which is
activity-based costing which was developed by (Cooper and Kaplan 1988). Cost accounting offers
very important knowledge for management both at strategic and operational level. In a world of
non-sustainable competitive advantage, costs have to be managed both aggressively and
intelligently. A firm that fails to reduce costs as rapidly as its competitors will find its profit
margins squeezed and its existence threatened. The competitive environment demands the
development of sophisticated cost management practices to keeps costs down.
Furthermore, some of its conceptual foundations are being scrutinized as never before, and
operating managers are complaining that existing systems fail to meet their needs in today’s
economic and technological environment (Shillinglaw 1989). Shillinglaw (1989) also added that
he isn’t clear where this lead to but what is clear to him is that managerial cost accounting must
change if it is to be a vital force in the future. The information produced by traditional cost
management is irrelevant and harmful to a business (Maskell 2009). According to Bicheno and
Holweg (2009), traditionally accounting systems were essentially backward looking, i.e. only
reporting on past performance, but giving few (if any) real pointers how to improve in the future
and are not able to reflect accurately the improvements made through lean.

Professors Kaplan and Johnson have stated that cost accounting is the number one enemy of
productivity (Kaplan and Johnson 1987). There are three principal shortcomings of traditional
accounting systems, i.e., 1) irrelevant and harmful to a business; 2) expensive to maintain; and 3)
divert the accountant’s attention from more important matters (Maskell 2009). Furthermore,
(Ostrenga, Ozan et al. 1998) mentioned that there are three important consequences to the
drawbacks of the traditional cost management systems, i.e. 1) These systems cannot provide
accurate product cost: where cost are distributed to products in a simplistic and arbitrary way that
usually does not represent the real demand imposed by each product on the company’s resources;
2) Such systems fail to stimulate decisions that can affect the overall production result. Managers
are sometimes encouraged to accomplish short-term goals by reducing expenses with training and
investments, or even by increasing the level of inventory. Although effective in the short term,
these decisions can seriously affect future results (Goldratt and Cox 1989); and 3) Cost
management information provided by traditional systems is of little help to managers in their effort

26
to improve production performance. Poor transparency allied with the lack of timeliness makes
cost information ineffective to help in the identification and elimination of waste.

Whereas, (Maskell 2009) has categorized the problem with management accounting under five
major headings, i.e.: 1) lack of relevance, 2) cost reduction 3) inflexibility 4) Incompatibility with
lean thinking and 5) inappropriate links to financial accounts.

Therefore, we can conclude that cost management accounting system needs renovation and hence,
a few solutions to the shortcoming encounter in traditional cost management are proposed in the
next section.

Furthermore,(Garg, Ghosh et al. 2003) reported that companies have been slow to implement new
tools and there is broad agreement that current cost systems aren’t providing accurate-enough
information. Organizations are loath to adopt new tools and techniques in management accounting
to help them resolve these problems because it is hindered by economic realities and internal
resource constraints as well as the difficulties involved with changing familiar practices. In
practice, most firms are still using traditional accounting system even though their faults are well
known (Innes, Mitchell et al. 2000; Garg, Ghosh et al. 2003). The problems that prevented the
costing system from adding value to the company were the “cost world” and the “cost per unit”
attitude that prevailed.

(Glad and Becker 1996) described modern cost accounting systems and information should
incorporate these criteria, i.e. 1) provide a multi-dimensional focus on a multiplicity of cost objects
such as customers, products, services, functions, processes and activities, 2) focus less on cost
tracking and reporting and more on cost planning and control, and 3) support every key business
decision, including sourcing, pricing, investment justification, efficiency and productivity
measures, product elimination and new product introduction. Therefore, the proposed solution was
aimed at eliminating the root problems and thereby all the unfavorable phenomena that stemmed
from them can be resolved.

2.11.1 ACTIVITY BASED COSTING (ABC) SYSTEM

Activity-based management (ABM) is a modern cost accounting and management model that is
consistent with the concepts of strategic management and reengineering. ABM is both an accurate
cost accounting system and a performance improvement tool (Turney, 1991). Like reengineering,
ABM focuses on business processes, which are collections of activities or work that result in
valuable output. Activity-Based Costing (ABC) is a cost method that has been recently adopted in
many industrial and service firms as a method to improve cost management in complex production
systems. It is basically a two-stage approach for allocating indirect costs to products based on cost
drivers of various levels (Kaplan and Cooper, 1998). In the first stage, resource costs (labour,
equipment and power) are assigned to those activities performed in the organisation. During the

27
second stage, activities costs are assigned to the cost objects based on selected cost drivers (e.g.,
machine set-up, quality inspection and material handling activities), which express a causal
relation between the activity demand and the cost object considered (Ostrenga et al 1998).
Notwithstanding the benefits of its application, ABC presents some drawbacks when compared to
traditional cost systems. Perhaps, the most important one is the large amount of data usually needed
in ABC systems.

In 1923, J. Maurice Clark coined the phrase ‘different costs for different purposes’, but most
companies only have one costing system, which is used for all purposes: stock valuation, planning,
control and decision-making (Brignall, 1997). Prior to the introduction of ABC costing system, a
number of companies, particularly manufacturing sectors, used a traditional costing system called
volume- based costing system, which is volume-based cost driver such as direct-labour hours,
direct labour cost, or machine hours. At most the cost are classified into two main parts that are
Product cost which is a cost assigned to goods that were either purchased or manufactured for
resale and Period cost where administration and selling are recognized as expenses during the
period in which they are incurred. If inventories are manufactured, the product cost is relatively
easy to trace to production job but manufacturing overhead is not easily traced to jobs as these
costs often bear no direct relationship with individual jobs or units of product (Hilton, 2005). The
conventional or traditional accounting system allocates the manufacturing overhead to the products
either plant wide overhead rate or on two-stage allocation system. The former allocates cost on a
single activity base for the entire factory but the latter assigns manufacturing overhead cost based
on departmental activities. Under this system, at the first stage, the manufacturing cost is collected
into cost pools and then attached to products by a method based on unit volume of production such
as direct labour hours (Brignall, 1997). Thus, the allocation of manufacturing cost depends on the
types of resources that the products consume. The greater the products consume the resource, the
higher the overhead attached to the products based on one particular activity base such as direct
labour hour, machine hour or direct labour cost. Furthermore, this system allows for cost
distortions, which will be greater in business units with a higher proportion of overhead costs
(Baird, Harrison, & Reeve, 2004).

While this approach has the advantage of simplicity, it will result in systematic mis-costing where
overheads are not volume driven (Innes & Mitchell, 1997). Researchers noted that this system
failed to reflect other resource or cost of activities that added value to the production (Adams,
1996; Innes & Mitchell 1997; Johnson & Kaplan, 1987). Other than that, Copper and Kaplan
(1987, cited in Adams, 1996) assert that traditional cost and management accounting systems such
as those based on standard costing and absorption costing have measured company performance
imperfectly because they have not kept up with the developments in production technology and
consumerism. Therefore, to avoid biased cost reporting, the allocation of overheads to cost objects
should not be based on a common volume-related measure, such as direct labour hour but on the
groups of activities which generate those overheads (Kaplan, 1987, cited in Adams, 1996).

28
An overhead allocation based on activity centers avoids a common consequence of traditional
output-based costing system particularly under cost low volume products. A study conducted by
Innes and Mictchell (1997) found that overheads based on activity centers facilitate the targeting
of unnecessary, wasteful, resource usage and the costly effects of over-complex ways of running
a business process. This technique, which is popularly known as Activity-Based costing (ABC),
is a ‘system that focuses attention on the costs of various activities required to produce a product
or service’ (Baird et al., 2004: 384). This system is in favor of many organizations in order to
provide “true” cost information for their strategic decision-making.

The ABC, first developed by Cooper and Kaplan (e.g. Cooper, 1988; Cooper and Kaplan, 1988),
is a system that will reduce the level of arbitrary cost allocations associated with “traditional”
costing systems and result in more accurate product cost (Baird et al., 2004). Many authors have
advocated the benefits of ABC, and a number of studies have provided empirical evidence to
support those benefits (Anderson, 1995; Foster and Swenson, 1997; McGowan and Klammer,
1997; Norris, 1994; Swenson, 1995all cited in Baird et al., 2004). Spicer (1993, cited in Adams,
1996) noted that besides providing more accurate product costing, ABC also improves the basis
upon which strategic decisions, involving resource allocation, product mix, pricing and marketing,
are made. Cagwin and Bouwman (2002) further listed authors who are in the opinion that, the
application of ABC is more effective in specific environmental conditions (enabling conditions)
such as manufacturing complexity (Jones, 1991), environments with specialty product costs
(Srinidhi, 1992) and diverse (multiple different) business environments (Cooper & Kaplan, 1988).
Furthermore, the refined treatment of overhead cost by using ABC system can facilitate the
identification of how individual customer influences the cost of supply (Innes & Mitchell, 1997).
Bellis-Jones (1989) found that when ABC is used in this way, customer profitability profiles and
analysis are possible and market strategy is enhanced by this intelligence (cited in Innes &
Mitchell, 1997).

In the beginning, ABC cost management system was common in the manufacturing environment
where the identification of activities associated with the products was still less complex and in
some instances the activities were direct. However, now even the service sectors adopt ABC cost
management, acknowledging the importance of cost information for survival in the increased
competition. A number of researches revealed successful applications of ABC in private as well
in public service sectors, such as financial institutions, hotel sectors, health centers, transport
companies, and telecommunication (Adams, 1996; Cagwin & Bouwman, 2002; Innes and
Mitchell, 1997; Kock, 1995; Kullven & Mattson, 1994; Lambert and Whitworth, 1996). Thus, the
service sectors shift the cost management focus from conventional costing system to the ABC
system.

2.11.2 ABC COST MODEL

29
The analysis of departmental activities is the first step of designing the system. Lambert and
Whitworth (1996) noted that the building block of an ABC system is the analysis of activities in
order to identify the following: the activities within each department and why, and under what
circumstances each activity is done; how often, and for whom, the activity is performed; resources
consumed in doing the activity; and, what factors determine or “drive” the activity or resource.
Similar to the manufacturing environment, every activity in service organization can be classified
into four areas, I) Unit Activities, performed on units of products, II) Batch Activities, performed
on batches of products rather than individual product unit, III) Product Activities, benefit all units
of a product and finally IV) Facility and Organizational Activities, facilities activities are incurred
only to support the ongoing facility operations.

The ultimate purpose of ABC system is to assign every activity cost incurred to product or service.
This system also eliminates non added value activities as discussed above to show the true cost
that the division incurred. Finally this cost can also be used as a performance evaluation tool to
evaluate the division performances from one year to another.

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Department of Accounting and Finance, University of Ilorin, Nigeria.

33
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

Research design according to Asika (1991:27) means the structuring of investigation aimed at

identifying variables and their relationships to one another. This is used for the purpose of

obtaining data to enable the researchers test hypothesis or answer research questions.

The researcher made used of the field research study design. This was based on extensive use of

personal interviews, examination of records and administration of questionnaires on the principal

officers and their subordinate staff. The rest of the chapter shows the details of research mythology.

3.2 POPULATION OF THE STUDY

34
ICAN study pack (2006) defines a population as being made up of specific conceivable traits,

events, elements, people, and subjects of observation which relate to the situation of interest in the

study to be conducted. “It is the aggregate of the total number of persons or objects for

investigations.

A population could either be finite or infinite. It is finite population when it is of estimable and

conceivable size or extent. Otherwise, it is termed an infinite population.

Renowned researchers argue that Ife population is at least-hundred, it is thus generally considered

as an infinite population.

The researcher therefore, considers the population of this study which is the aggregate number of

employees in the departments, an infinite population (i.e unknown or population with

replacement).

3.3 SAMPLING TECHNIQUES AND SIZE

The sampling technique adopted by the researcher is the sample random sampling method. It is

one of the probability sampling techniques used when the population for the study is unknown.

Due to certain known constraint.

In research like impartibility of covering large or unknown population in research, a sample which

is a fraction or segment of the population and what a researcher can practically work with is

selected by the researcher.

Sample size is the total number of people or objects that the researcher has randomly or non-

randomly selected or determined out of the population.

35
 Using Mc Godwin’s formula, presented by Cochran, W.G. (1963)

n0 = Z2.P q

e2

Where n0 = sample size to be determined

Z = the abscissa of the normal curve that cuts off an area at the tails of level of

precision (e) which is 5% = 1.96 (according to statistical table).

P = the estimated proportion of non-variability attribute present in the

population = 98%

q = the estimated proportion of variability attribute present in the

Population = 1 – p = 1 – 0.98 = 0.02 = 2%

e = level of precision or significance = 5%

by substitution: n0 = (1.96)2 X 0.98 X 0.02 = 30

0.05

However, the non-variability attribute of 98% is present in the population.

3.4 SOURCES OF DATA

Although the data for the study came from both primary and secondary sources, it was

fundamentally predicated on primary data obtained from questionnaires and personal interviews.

36
The main sources of secondary data were the Nigerian Bottling Company (NBC) Plc Newsletter

and training manual.

DESCRIPTION OF RESEARCH

3.5.1 DESIGN AND ADMINISTRATION OF QUESTIONNAIRES

The questionnaires were self-administered and design to secure maximum responses from

respondents. The research questions and null hypothesis guided the construction of the

questionnaire to test the validity and reliability of the questionnaire. In all thirty (30) questions will

be used in the questionnaires. The questionnaires included questions with “Yes” and No options

as well as multiple choice answers. To ease analysis, the questionnaires was divided into two

sections A and B. Section A was designed to elicit information on general background, while

section B contained questions relating to cost management, control and cost reduction and also

hypothesis testing. However, only questions contained in section B were analyzed because they

were more fundamental to the objectives of the study. Questionnaires were administered on the

ten (10) departmental heads as well as sixty-five (25) subordinate staff in the ten departments that

make up Ikeja plant.

37
3.5.2 PERSONAL INTERVIEW/TEST OF HYPOTHESIS

In order to elicit more useful information on the problem under investigation and to corroborate

the responses from the questionnaires, the researchers will conduct personal interviews on four (4)

of the principal officers.

3.6 TECHNIQUES FOR DATA ANALYSIS

The researcher will make use of tables for presentation and analysis of data. The chi-square (X2)

statistic will be used for testing hypothesis. The chi-square (X2) formula is given below;

X2 = ∑(O – E)2

Where O = observed frequency i.e. actual data from the

Questionnaire responses

E = expected frequency

The degree of freedom is calculated thus:

D.F = (r – 1) c – 1)

Where r = number of rows

38
 c = number of columns

The level of significance () can be set at 5%.

Decision Rule

If the computed X2 is less than X2 from the tables accept the null hypothesis H0, otherwise reject

H0 and accept the alternative hypothesis H1.

39
 REFERENCES

Anyanwu, A. (2000). Research Methodology in Business and Social Sciences. Owerri: Canun

Publishers (Nig) Ltd.

Asika, N. (1991). Research Methodology in the Behavioural . Ikeja: Longman Nigeria Plc.

Chukwu, B. I. (2002). Fundamental Business Statistics. Enugu: Hoursthrone Concepts.

ICAN Study Pack (2006), Business Communication and Research Methodology, VI Publication,

Lagos.

Onyenankeya, O.S. (2001). Integrated Statistics. Owerri : Alphabeth Publishers.

40
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.0 INTRODUCTION

The purpose of this chapter is the analysis of the primary data gathered from the field study.
Twenty questionnaires were distributed to the staff of Nigerian bottling company (NBC) Plc at
Ikeja Plant of Lagos State to answer their views on the Appraisal of the Effect of Cost
Management on Companies Profitability. All the twenty questionnaires were administered; and
they were returned making it 100% response rate. Firstly, data presentation using frequency
distributions and comparison of means, also Chi-square was used to test the derived hypothesis.
The statistical software package SPSS (Statistical Program for the Social Sciences) now known
as PASW is a computer program used for statistical analysis. Before 2009 it was called SPSS,
but in 2009 it was re-branded as PASW (Predictive Analytics Software) was used in the analysis
of the data.

41
4.1 FREQUENCY DISTRIBUTIONS

Table 1

Sex

Cumulative
Frequency Percent Valid Percent Percent
Valid Male 13 65.0 65.0 65.0
Female 7 35.0 35.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

From the table above, 65.0% of the respondents are male, while 35.0% are female. Thus majority
of the respondents are male.

Table 2

Age

Cumulative
Frequency Percent Valid Perc ent Percent
Valid 20-30 yrs 10 50.0 50.0 50.0
31-40 yrs 7 35.0 35.0 85.0
41-50 yrs 3 15.0 15.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

This table reveals that 50.0% of the respondents are between 20-30years of age, 35.0% fall in 31-
40years, while 15.0% of the population fall in 41-50 years and above. Thus majority of the
respondents fall in 20-30 years age range.

42
Table 3

Educational Qualification

Cumulative
Frequency Percent Valid Percent Percent
Valid OND/NCE 5 25.0 25.0 25.0
B.Sc/HND 8 40.0 40.0 65.0
ACA 4 20.0 20.0 85.0
CIBN 3 15.0 15.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

This table reveals that 25.0% of the respondents are holder of OND/NCE, 40.0% are HND and
Bachelor of Science holders, 20.0% have professional certificate in ACA and 15.0% have in
CIBN.

Table 4

Marital Status

Cumulative
Frequency Percent Valid Percent Percent
Valid Married 7 35.0 35.0 35.0
Single 13 65.0 65.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

This table reveals that 35.0% of the respondents are married while 65.0% of the population are
single.

43
Table 5

W orki ng Experie nce in the Unit

Cumulative
Frequency Percent Valid Perc ent Percent
Valid 1-5 yrs 11 55.0 55.0 55.0
6-10 y rs 7 35.0 35.0 90.0
11-15 yrs 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

This table shows that 55.0% of the respondents have spent 1-5 years in service, 35.0% have
experience of 6-10 years in the unit while 10.0% have spent more than 10 years in service.

Table 6

Area/Line of Practice

Cumulative
Frequency Percent Valid Percent Percent
Valid Finance/Accounting 9 45.0 45.0 45.0
Internal Audit 7 35.0 35.0 80.0
Financial Analysis 2 10.0 10.0 90.0
Investment 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 6 shows that 45.0% of the respondents are in finance/accounting line of practice, 35.0%
are internal audit staff, 20% are financial analysts while 10.0% are investors by profession.

44
Table 7

How would you rate the effectiveness of methods of cost management of your organisation

Cumulative
Frequency Percent Valid Percent Percent
Valid Very high 12 60.0 60.0 60.0
High 4 20.0 20.0 80.0
Average low 2 10.0 10.0 90.0
Very low 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 7, shows that 60.0% of the respondents rate the effectiveness of methods of cost
management of your organisation very high, while 20.0% rate high, 10.0% average low and
10.0% rate it as very low. Thus, majority of the respondents rate the effectiveness of methods of
cost management in your organisation as very high.

Table 8

To what extent Is there a relationship between cost management and company’s’ profitability?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very high 13 65.0 65.0 65.0
High 5 25.0 25.0 90.0
Average low 1 5.0 5.0 95.0
Very low 1 5.0 5.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 8 shows that 60.0% of the respondents concur that there a relationship between cost
management and companies’ profitability is very high, 25.0% as high, 5.0% average while 5.0%
very low.

45
Table 9

How can you rate the impact of cost management system on your
companies’ profitability?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very high 6 30.0 30.0 30.0
High 12 60.0 60.0 90.0
Average low 1 5.0 5.0 95.0
Very low 1 5.0 5.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 8 shows that 60.0% of the respondents be in accord that the impact of cost management
system on your company’s profitability is very high, 60.0% as high, 5.0% average while 5.0%
very low.

Table 10

How in your opinion would you say cost system makes available historical,
current actual, and simulated future cost information?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very satisfactory 13 65.0 65.0 65.0
Satisfactory 5 25.0 25.0 90.0
Average 1 5.0 5.0 95.0
Not very satisfactory 1 5.0 5.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 10 shows that 65.0% of the respondents were very satisfactory with the fact that cost
management system makes available historical, current actual, and simulated future cost

46
information, 25.0% were satisfactory, 5.0% average while 5.0% not very satisfactory with the
fact that cost management system makes available historical, current actual, and simulated future
cost information.

Table 11

How regular are appraisals carried out on the use your cost system to hold
individuals and groups accountable for reasonable performance standards?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very regular 8 40.0 40.0 40.0
Regular 11 55.0 55.0 95.0
Average 1 5.0 5.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 11 shows that 40.0% of the respondents are of the opinion that are appraisals carried out
on the use your cost system to hold individuals and groups accountable for reasonable
performance standards, 55.0% concurred with the regular appraisals, while 5.0% are of the
opinion of average checks.

Table 12

How would you rate the adequacy of use your cost system to analyze discrete
points of profitability such as customer, product, and region?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very high 11 55.0 55.0 55.0
High 7 35.0 35.0 90.0
Average low 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 12 reveals that 55.0% of the respondents rated the adequacy of use your cost system to
analyze discrete points of profitability such as customer, product, and region as very high, 35.0%

47
rated it as high while 10.0% of the respondents rated the adequacy of use your cost system to
analyze discrete points of profitability such as customer, product, and region.

Table 13

Are staff members educated on cost management system and

methods?

Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 16 80.0 80.0 80.0
No 4 20.0 20.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 13 reveals that 80.0% of the respondents answered yes there are are staff members
educated on cost management system and methods, while 20.0% answered by saying no to the
above question.

Table 14

Management staff is enlightened on cost management system?

Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 16 80.0 80.0 80.0
No 4 20.0 20.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 14 reveals that 80.0% of the respondents answered yes their Management staff is
enlightened on cost management, while 20.0% answered by saying no to the above question.

48
Table 15

How objective would you rate how your cost system provides timely reporting, and its data is easy to access?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very large 8 40.0 40.0 40.0
Large 8 40.0 40.0 80.0
Average 3 15.0 15.0 95.0
Low 1 5.0 5.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 15 shows that 40.0% of the respondents rated how your cost system provides timely
reporting, and its data is easy to access as very large, 40.0% as large, 15.0% as average while
5.0% rate how your cost system provides timely reporting, and its data is easy to access as low in
the above question.

Table 16

How would you rate the extent in which your cost system regularly warns you
when unhealthy financial thresholds are approaching?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very large 4 20.0 20.0 20.0
Large 13 65.0 65.0 85.0
Average 3 15.0 15.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

49
Table 16 shows that 20.0% of the respondents rated the extent in which your cost system
regularly warns you when unhealthy financial thresholds are approaching as very large, 65.0% as
large, while 15.0% as average.

Table 17

To what extent do you use your cost system to help realign

resources when your business priorities change?

Cumulative
Frequency Percent Valid Percent Percent
Valid Very large 13 65.0 65.0 65.0
Large 5 25.0 25.0 90.0
Average 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 17 shows that 65.0% of the respondents rated the extent to which you use your cost system
to help realign resources when your business priorities change as very large, 25.0% as large,
while 10.0% as average.

Table 18

Do you believe your cost system is realistic and reliable?

Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 18 90.0 90.0 90.0
No 2 10.0 10.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 18 shows that 90.0% of the respondents believed that your cost management system is
realistic and reliable? while 10.0% of the respond are of the view of saying no.

50
Table 19

Do your strategic planning process makes use of your cost

Information?

Cumulative
Frequency Percent Valid Percent Percent
Valid No 20 100.0 100.0 100.0

Research Survey, 2011

Table 19 shows that the entire respondents partaken in answering agreed by saying that your
strategic planning process makes use of your cost information.

Table 20

Do your cost systems makes available historical, current actual, and simulated future cost information?

Cumulative
Frequency Percent Valid Percent Percent
Valid Yes 17 85.0 85.0 85.0
No 3 15.0 15.0 100.0
Total 20 100.0 100.0

Research Survey, 2011

Table 20 shows that 85.0% of the respondents participated in answering this question agreed by
saying yes that your cost systems makes available historical, current actual, and simulated future
cost information while 15.0% said no.

51
4.2 TEST OF HYPOTHESES

HYPOTHESIS 1

H0: There is no significant impact of effective cost minimization measures on the growth and
profitability of Nigerian manufacturing firms.

H1: There is significant impact of effective cost minimization measures on the growth and
profitability of Nigerian manufacturing firms.

NPar Tests

Chi-Square Test

Frequencies

To what extent is there a relationship between cost

Management and company’s profitability?

Observed N Expected N Residual

Very high 6 5.0 1.0
High 12 5.0 7.0
Average low 1 5.0 -4.0
Very low 1 5.0 -4.0
Total 20

52
 Test Statistics

To what extent
is there
A relationship
between
Cost management
And company’s
profitability

Chi-Square a 16.400
df 3
Asymp. Sig. .001
a. 0 cells (.0%) have expected frequencies less than
5. The minimum expected cell frequency is 5.0.

INTERPRETATION OF RESULT

X2cal = 16. 400, X2tab = 7.815

Since the calculated value is greater than the tabulated value; the null hypotheses is rejected and
the alternative hypotheses is accepted which stated there is significant impact of effective cost
minimization measures on the growth and profitability of Nigerian manufacturing firms.

HYPOTHESIS 2

H0: There is no significant difference in various elements of cost before and after embarking on
cost minimization strategies.

H1: There is significant difference in various elements of cost before and after embarking on
cost minimization strategies.

NPar Tests

Chi-Square Test

Frequencies
53
 To what extent do you use your cost system to help realign
resources when your business priorities change?
Observed N Expected N Residual
Very high 12 5.0 7.0
High 4 5.0 -1.0
Average low 2 5.0 -3.0
Very low 2 5.0 -3.0
Total 20

Test Statistics

To what extent do you use your

cost system to help realign resources when

your business priorities change?

Chi-Square a 13.600
df 3
Asymp. Sig. .004
a. 0 cells (.0%) have expected frequencies less than
5. The minimum expected cell frequency is 5.0.

INTERPRETATION OF RESULT

X2cal = 13.600, X2tab = 7.815

Since the calculated value is greater than the tabulated value; the null hypotheses is rejected and
the alternative hypotheses which stated that there is significant difference in various elements of
cost before and after embarking on cost minimization strategies.

54
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 INTRODUCTION

This chapter contains an abridged version of the entire research work which includes the

summary of study, conclusion drawn from the findings and recommendations made in respect of

the conclusions drawn.

5.1 SUMMARY OF FINDINGS

Based on the data analyzed, the researcher was able to find out that where there is relationship

between cost management and companies’ profitability and the task of performance appraisal is

made lots easy. This is so because cost management systems makes available historical, current

actual, and simulated future cost information which are then used to appraisal the cost effects on

profitability. In addition, the findings showed that there is significant difference in various

elements of cost before and after embarking on cost minimization strategies. This helps to ensure

reliability and accuracy of cost system to help realign resources when your business priorities

change. The findings also revealed how a good cost management system would regularly warns

you when unhealthy financial thresholds are approaching. Some of the other findings are

itemized below:

1. It was found from the research study that costs are controlled at the Nigerian bottling

company (NBC) Plc. Such costs according to respondents are controlled by all functional needs.

55
2. Findings also showed that the decision to control costs in the company was necessitated

by rising costs.

3. The main systems of the cost control at the Nigerian bottling company (NBC) Plc are

budgetary control and standard costing.

4. Findings reveals that the role of the accountant in cost control is advisory while that of

management is supportive.

5. It is also found out from the research study that standard of performance and cost levels

are reasonably set by management

6. In operating the cost accounting systems, actual performance is compared with planned

performance for control purposes.

7. Findings also revealed that the company takes advantage of quantity and cash discounts

to reduce unit costs and uses the economic order quantity (EOQ) hits procurement of raw-

materials.

56
5.2 CONCLUSION

Profitability and cost management is an imperative for manufacturing companies. This is being

driven by both regulatory requirements and competitive pressures. Effectively addressing the

challenges of profitability and cost management involves mastering a methodology,

understanding the business drivers, changing business processes, and introducing a system that

supports an efficient process. The impact of profitability and cost management ripples through to

all management processes and is a key component of an overall enterprise performance

management system.

The interest in profitability and cost management is re-emerging, and the topic is increasingly

being elevated to the board‘s agenda. Profitability and cost management is more relevant than

ever. There are multiple reasons for this, both on the tactical side—responding to internal and

external pressures, and from a strategic point of view—increasing the organization‘s

competitiveness.

It may be relatively easy to attribute revenues to the sales of specific products, but individual

products alone do not make a competitive difference anymore. It is the service that comes with

the product that makes the difference. Whereas Activity Based Costing (ABC) had a strong focus

on the back-office as an analytical tool to optimize processes, profitability and cost management

solutions can be used for service pricing—where the relationship between resources, activities,

and revenues is not always easy to make.

The cliché that business experiences higher cost and regulatory pressures will come as no

surprise in the manufacturing industry. Customers, suppliers, shareholders, and regulators, all

demand more transparency. Executives cannot allow surprises regarding their profitability. They

57
need to ensure that both cost and revenue are managed in alignment throughout the organization.

A solid set of processes, a comprehensive methodology, and a robust system are needed to meet

these requirements. In fact, if executives do not ensure such a level of control in a transparent

and regulated world, it will cost them dearly.

The researcher posited that organizations that have fully matured have built in profitability

management in their core business processes. They do not only know where they are profitable,

but also why they are profitable. Profitability management is not an after-the-fact analysis, or a

top-down plan. Instead, it is incorporated into every single transaction. Indirect functions know

their impact and contribution on the core processes. Operational managers have the information

to assess the efficiency and effectiveness of their decisions. The planning process doesn‘t just

focus on financial results, but rather dynamically incorporates resources and activities.

Organizations that have reached this level have extended their operational excellence strategies

to include management excellence.

Based on the findings from the literature review much has been reported about the shortcomings

of the existing traditional cost management. Most of the research findings reported was on the

drawbacks existed in manufacturing industry and a few others in construction industry. These

outcomes give the indication the cost management in other sector are still relevant to be used.

The study also reveals that finance and operations professionals must be vigilant in maintaining

healthy relationships, where the contributions of each are recognized and appreciated. The

behavioral implications of a Cost Management System design have to be carefully anticipated

and managed. Strategy, accountability, and performance concerns are central ingredients for

Cost Management System design to drive performance that is aligned with strategic intention.

58
Overall, the study revealed that the cost management systems if effectively and appropriately put

in place would make the company’s profitability appraisal a point of reference in making

strategic, tactical and operational decisions.

Finally, the researcher put forward two research hypotheses which were tested statistically using

SPSS new version. The results of the test of hypotheses were interpreted and discussed. From the

interpretation and discussion the following findings emerged;

1. There is significant impact of effective cost minimization measures on the growth and

profitability of Nigerian manufacturing firms.

2. There is significant difference in various elements of cost before and after embarking on

cost minimization strategies.

5.3 RECOMMENDATIONS

In view of the finding of the study, the following recommendations are worth noting.

Firstly, organizations should begin by developing a plan of action for improving the profitability

of their underperforming assets, i.e. those customers and products that fall below the line.

Profitability optimization and profitability planning are introduced, after profitability reporting

and profitability analysis. The key drivers of profitability provide the baseline for the desired

profitability performance of the assets.

Secondly, improving profitability requires more than just identifying the data between the plan

and the actual results. It requires creating and comparing multiple scenarios to achieve optimal

performance. Once a scenario is selected, budgets and plans need to be updated to execute upon

59
the selected scenario. Organizations in this stage often benchmark profitability internally, asking

questions such as: What is the profitability today versus a time-period ago? How does the

profitability with the new organizational structure compare to the old organization structure?

Many organizations in this stage bring in external data to establish benchmarks in order to

compare themselves to their competition.

There should be an effort towards entrenching the current cost management system into all

aspect of the company’s activity and educate the drivers of the system on the application of the

methods.

In order to improve on the quality of performance management of manufacturing companies, the

setting up of sound cost management systems in specific areas of their operations there is need

for the standardization, review and update of cost management.

5.4 AREAS OF FURTHER RESEARCH.

In this research, samples were taken only from NBC Plc, Lagos. No attempt was made to

examine the effect of cost management on the profitability in other firms that make up the

manufacturing industry. Further research could be carried out by other researchers using other

firms in the manufacturing industry within and outside Lagos.

60
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Kohler’s Dictionary for Accountants, 6th ed. (Englewood Cliffs, NJ: Prentice-Hall

College Division, 1990), 528–529.

Robert S. Kaplan and Robin Cooper, (1998), Cost & Effect: Using Integrated Cost

Systems to Drive Profitability and Performanc (Boston: Harvard Business

School Press, 1998), viii–ix., Pp 24–27.

McNair C. J., “Defining and Shaping the Future of Cost Management,” Journal of

Cost Management 14, no. 5 (2000):Pp 32.

Brian M. (1996), Making the Numbers Count:The Accountant as

Change Agent on the World-Class Team, (Portland: Productivity

Press, 1996): Pp 17,3.

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 John O. R. Etal, (2011), Profitability and Cost Management in Healthcare

Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA

94065 U.S.A.

Noah A. O., (2009), Organisational Efficiency of Cost Control in Service

Industry. Department of Accounting and Finance, University of Ilorin, Nigeria.

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 APPENDIX

UNIVERSITY OF LAGOS

FACULTY OF DISTANCE LEARNING INSTITUTE

DEPARTMENT OF ACCOUNTING

QUESTIONNAIRE

I Thompson Eunice Nneka, a final year student of the Department Of Accounting, Faculty Of
Distance Learning Institute, university Of Lagos. I am presently conducting a research on “The
Appraisal of the Effect of Cost Management on Companies Profitability”. Kindly respond to
the items of this questionnaire.

The research is purely for academic purpose and is being undertaken in partial fulfilment of the
requirement for the award of Bachelor of Science degree in Accounting. The confidentiality of
respondents’ data shall be strictly maintained.

Thanks in anticipation of your co-operation.

SECTION A: BIO – DATA

Kindly tick the appropriate response in the spaces provided below.

(1) Sex : Male ( ) Female ( )

(2) Age: 20-30 ( ) 31-40 ( )

41-50 ( ) above 50 ( )

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(3) Educational qualification:

OND/NCE ( ) B.SC/HND ( )

(4) Marital status: Married ( ) Single ( )

(5) Working experience in the unit

1-5years ( ) 6-10years ( ) 11-15year ( )

Above 16 years ( )

(6) Area/Line of Practice: ( ) Finance/Accounting ( ) Internal Audit

( ) Financial Analysis ( ) Investment

SECTION B

Kindly tick the appropriate response in the spaces provided.

(7) How would you rate the rate the effectiveness methods of cost management in your
organisation?

Very high ( ) High ( ) Average low ( ) Very low ( )

(8) To what extent Is there a relationship between cost management and companies’
profitability?

Very high ( ) High ( ) Average low ( ) Very low ( )

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(9) How can you rate the impact of cost management system on your company’s profitability?
Very high ( ) High ( ) Average low ( ) Very low ()

(10) How in your opinion would you say cost system makes available historical, current
actual, and simulated future cost information?

Very satisfactory ( ) Satisfactory ( ) Average ( ) Not very satisfactory ( ) Not satisfactory ( )

(11) How regular are appraisals carried out on the use your cost system to hold individuals
and groups accountable for reasonable performance standards?

Very regular ( ) regular ( ) average ( ) Not regular ( )

(12) How would you rate the adequacy of use your cost system to analyze discrete points of
profitability such as customer, product, and region? Very high ( ) High ( ) Average low (
) Very low ( )

(13)Are staff members educated on cost management systems and method?

Yes ( ) No ( )

(14) Management staff is enlightened on cost management? Yes ( ) No

( )

(15) How objective would you rate how your cost system provides timely reporting, and its
data is easy to access?

Very high ( ) high ( ) average ( ) low ( ) Very low ( )

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(16) How would you rate the extent in which your cost system regularly warns you when
unhealthy financial thresholds are approaching?
Very large ( ) large ( ) average ( ) Low ( ) very low ( )

(17) To what extent do you use your cost system to help realign resources when your business
priorities change?

Very large ( ) large ( ) average ( ) Low ( ) very low ( )

(18) Do you believe your cost system is realistic and reliable?

Yes ( ) No ( )

(19) Do your strategic planning process makes use of your cost information? Yes ( ) No ( )

(20) Do your cost systems makes available historical, current actual, and simulated future
cost information? Yes ( ) No ( )

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