CHAPTER ONE

BACKGROUND OF THE STUDY

INTRODUCTION

          In all business enterprise, the implementation of cost volume profit analysis is very important and can never be over emphasized and to achieve this goal, target and objectives, it is beckoned on the decision of the managers. However, cost volume profit analysis is a tool used by managers of business organization or manufacturing firms in making sure that proper decision are made in other to achieve the targeted goals or objective of such business.

          This research work intends to cover the responsibilities and the relationship of cost volume profit analysis that could be positive or negative in business decision making. And the used of cost volume profit analysis to determine the firm operating income and the net income as discussed by “Thurmas. V” 2008. It also aimed at establishing a minimized cost and creating room for a maximized profit through the use of cost volume profit analysis.

          More so, in an organization where we have multiple product lines, the used of cost volume profit analysis is of important in the aspect of decision making and in most case to know which of the product line have higher contribution to profit than the other in business organization. Is a tool used to show the relationship between various ingredients of profit planning and if properly applied it enable the company to satisfy the industry and stakeholders of such business.

          Furthermore, some underlying assumptions are drawn from the reference materials which are covered in this research work. Some areas of concerned include the limit to the implementation of C.V.P analysisor manufacturing organization to enable the preparation of simple income statement.

          Finally, despite the enormous important of C.V.P analysis, some demerit associated with it are in the aspect of some basic assumption used in the implementation of C.V.P. analysis which do not exist for more than one accounting period.

STATEMENT OF PROBLEMS

          Among all the enormous problems listed by previous researchers that are associated with this research work, this research work intends to address the following problems:

a.                The result of the analysis can only be relied upon within the relevant range i.e. within the activity level that the associated cost can be accurately determined.

b.               The likely set back that may have take place if cost volume profit analysis is not adequately applied in manufacturing organization.

c.                The likely change of fixed cost at different activity level make the assumption that fixed cost is a faulty assumption.

OBJECTIVES OF THE STUDY

a)      To determine the extent to which cost volume profit analysis can be relied upon for proper decision making

b)      To identify the intended solution provided by applying the usefulness of cost volume profit analysis in decision making in manufacturing organization.

c)      To determine the changes in fixed cost at different level of activity, it is important as it’s concern taking decision for multiple product line in manufacturing firms cannot be over emphasized.

RESEARCH HYPOTHESIS

          This study set out text among other things which include the following hypothesis

a.      H­O: that the present cost volume profit analysis applied for decision making is not useful.

H1: that the present cost volume profit analysis applied for decision making is useful

b.      HO: that the present cost volume profit analysis applied in manufacturing organization is not useful.

H1: that the present cost volume profit analysis applied in manufacturing organization is useful

c.      HO­: the assumption that fixed costs remain constant is not relevant for decision making in manufacturing organization.

          H1: the assumption that fixed cost remain constant is relevant for decision making in manufacturing organization.

1.5    SCOPE OF THE STUDY

          This research intends to cover the cost volume profit analysis adopted by various manufacturing companies especially for their production activities. As a matter of fact, only the branch of Innoson Technical Enugu will be limited to the study; however generalized view will be taking on other Nigerian branches which gave room for further studies.

SIGNIFICANCE OF THE STUDY

          The study has both practical and academic significance as documented below.

PRACTICAL SIGNIFICANCE

          This research work will be of paramount importance to manufacturing company, their manager and production staff of the company. This research will also serve as a guide in the performance of their respective duties. It will help them in appreciating the importance of cost volume analysis in decision making of their companies.

ACADEMIC SIGNIFICANCE

          It will be of immense help in our educational process in the aspect of management decision making and for individual in the aspect of man power development. It is also important in the upgrade of student educational qualification as it concern cost-volume- profit analysis for decision making.

DEFINITION OF TERMS

i.       COST BEHAVOIR: Cost behaviour considers how a given cost reacts in total to changes in output of production. There are at least three different ways in which cost behave viz variable fixed and mixed.

ii.     BREAK EVEN: The point at which total revenue equals total  cost and the company makes no profit or loss.

iii.          COST-VOLUME-PROFIT ANALYSIS – This represents the application of marginal costing that seeks to study the relationship between cost, volume and profit.

iv.            FIXED COST: These are costs which do not change in total with changes in level of output example, interest, audit fees, rent.

v.               VARIABLE COST: These are costs that vary in line with output. They are referred to as activity based cost because of the level of activity undertaken.

vi.            SALE MIX: The properties of unit of product sold in a multiple production company

vii.        CONTRIBUTION MARGIN: These are the difference between revenue (sales) and variable cost in total, as total revenue less total variable cost.