CHAPTER ONE

GENERAL INTRODUCTION

1.1  Introduction

This research work on the effect of cost control practices on the profitability of manufacturing companies in Bonaberi-Douala is divided into five chapters. The chapter one is contained with the overview or layout of the whole write up, the background of the study, problem statement, research questions, research objectives, hypotheses, the scope and significance of the study and operational definition of terms. The chapter two is made up the conceptual review, theoretical review, empirical review and research gaps and contributions. The chapter three is made up of the research design, area of study, population of the study and sampling technique and size, instruments of data collection and analysis, measurement of variables, reliability and validation of data and ethical considerations. The chapter four presents result of findings, terms of descriptive and regression findings. The last chapter present summary discussion of findings, conclusion and recommendations.

1.2  Background of the Study

 An increase in manufacturing costs and reduced sales revenue which has added to reduced profitability in the Manufacturing sector has produced the need for us to address the problem through this research. Mapakame (2014) reported that businesses and in particular the             manufacturing companies are finding it difficult to increase their profits and sales volumes due to various factors. In an economy where consumer’s disposable incomes are very low, a few companies are experiencing any meaningful increases in market share or sales volumes. Reduced growth prospects are being accompanied by increased costs.

 Generally, the costs of production and other operational costs in this economy are very high as noted by Lynton-   Edwards Securities (Mapakame, 2014).

Reduced sales volumes and high cost of production has led to reduced profitability in these industries. Faced with limited sales growth prospects, companies have to focus on costs which are a major determinant in profitability level. Cost control measures have had and need to be used in manufacturing companies to control and reduce costs to such levels which aid profitability (Mapakame, 2014).

Implementing effective cost control measures can help address some of these issues by identifying and eliminating inefficiencies, reducing waste, and enhancing overall performance (Oyedokun, et al, 2019). Effective cost control measures allow firms to optimize their resources, minimize waste, and increase their competitiveness in the market (Aggreh et al, 2023).

Cost control is a necessary activity in relation to cost management. Sanni and Hashim (2013) posit that it is important to control cost in order to reduce excessive usage of resources for organisations or stakeholders to function on an active cost control in order to keep cost of the scheme or product within the budget.

 Notably, et al (2013) states that when an organisation’s cost of operation increases, it leads to increment in cost of production and leads to rise in selling rate. Thus, organisations require efficient cost control to achieve maximum profit in a competitive market. Minimising production cost through relevant cost techniques is the focus of many managers as competition arises in the business environment with an unstable market system. In the manufacturing sector, cost management is a significant administrative tool vital to the success and continuity of the sector.

One of the benefits of cost control is the ability of a company to keep cash flow at necessary levels of operations, that is, with cost control, excessive amount of cash is not too tied up in inventory, it prevents over supply of stock or over staffed departments and this keeps cash available for other purposes including navigating economic waves, expansion needs or repairs and maintenance of equipment.

Many manufacturing companies use outside assessments to analyse their efficiency including the result of cost control effort, this does not only bring new viewpoints to the process, but also provide important internal review. Sometimes it is difficult to be objective when you deal with management of a business on a day-to-day basis, but professional analysts can bring a broader scope to operations resulting in improved cost control strategies. Budget requires coordination throughout the organisation. Each department or unit within the organisation is responsible to prepare its part of the budget, which is then coordinated with the overall company budget. Budget assigns responsibility to the management in each unit. Budgeting is an integral part of the planning process. Successful companies plan for their futures through the discipline of preparing an annual business plan, stipulating their financial and quantitative goals and strategies. Olagunju (2014). According to Alireza and Mahdi (2016), the profitability of every organization is primarily defined by how well it manages its costs.

This is due in part to the fact that in order to maximize profit, costs must be kept to a bare minimum. Cost cutting has become a critical technique for businesses to use in order to keep ahead of the rising competition in the business climate. In light of the aforementioned, this study will assess the potential effect and relationship of cost cutting approaches in producing effective profitability that will keep the organization floating.

Profitability is “a business’s ability to use its resources for generating revenue over its expenses” (Hofstrand, 2009). It is significant to measure the current profitability, compare past profitability and project future profitability in all businesses in the long run. Profitability is closely related to profit, but there is a key difference between the two.

Profit is the net amount earned by a business after deducting all the expenses from its revenue. Profitability is an accounting metric used to determine a company’s profit in relation to the size of the business. Profit can be explained as an absolute measure, while profitability can be defined as a relative measure of how profitable an enterprise is. It also implies that a profitable business is a business receiving profit, but the opposite is not always true (Horton, 2019,).

Profitability is one of the most important goals of financial management besides maximizing the owner’s wealth. Profitability is a very important performance determinant as it tracks the growth of the organisation. An unprofitable business is impossible to survive. Conversely, highly profitable businesses have the ability to reward their owners with large profits on their investments.

Studies have been conducted over the years to prove that profitability is a determinant of the company performance. Therefore, the ultimate goal of a business is to gain a profit to ensure its business continuity under the prevailing market conditions (Handriani and Robiyanto, 2018). 

Profitability is able to describe the company’s performance in terms of the profits it receives from investments by shareholders or the amount of capital used in the business or in relation to sales activities. Considering the main purpose of investing which is for profit, therefore the profits derived from a business are used to measure the success of the investment.

The purpose of this study is to explore the most significant profitability determinants of the manufacturing companies in. Several independent variables examined for their influence on profitability were working capital, firm size, firm growth, capital structure, and non-debt tax shields (Borio et al, 2017).

The widely accepted key measures to calculate and determine profitability are break-even analysis, return on assets (ROA) and return on investments (ROI), and profitability ratios. Break-Even Analysis Break-even analysis refers to the point in a business where the expenses are net equal to the revenue. Break-even analysis shows the amount of product units that must be sold to cover the fixed and variable costs of production (Tsorakidis, 2011). Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea of how efficient a company’s management is at using its assets to generate earnings. ROA is displayed as a percentage, the higher the ROA the better (Rist, 2014). Return on Assets (ROA) = Net Income/Total Assets Return on Investment (ROI). Return on investment (ROI) is a financial metric that is widely used to measure the probability of gaining a return from an investment. It is a ratio that compares the gain or loss from an investment relative to its cost.

It is as useful in evaluating the potential return from a stand-alone investment as it is in comparing returns from several investments. An annual return rate of 10% or more is a good ROI (Rist, 2014). Return on Investments (ROI) = Net profit before Tax/ Capital.

Manufacturing firms face numerous challenges that can impact their profitability and long-term viability (Idigo, 2023). These challenges include inadequate funding, high operating costs, intense competition, and fluctuating market conditions.

Bonaberi-Douala 1 Municipality, encompassing industrial clusters like Bonaberi and Bassa, plays a critical role in Cameroon’s manufacturing landscape.

The area’s infrastructure and proximity to Bonaberi-Douala Port make it a strategic location for manufacturing enterprises. Companies operating in this zone benefit from access to transportation, skilled labour, and supportive industrial policies.

1.3  Statement of the Problem

The prevailing state of low profitability of manufacturing companies in Bonaberi Bonaberi-Douala due to an increase in costs (operational and production cost) presents largely negative consequences such as collapse of most businesses due to low profits. A number of manufacturing companies have failed and closed after incurring a lot of losses. So, this increases in cost (operational and production   costs) which has added to reduced profitability in the Manufacturing companies has produced the need to address the problem through this research.

1.4 Research Questions

1.4.1 Main Research Question

How does cost control measures used by manufacturing businesses in Bonaberi-Douala affect their profitability?

1.4.2 Specific Research Questions

1. How does budgetary control affect profitability of manufacturing companies?
2. How does standard Costing affect profitability of manufacturing companies?
3. How does activity-based Costing affect profitability of manufacturing companies?

1.5 Research Objectives

1.5.1 Main Research Objective

To assess the effect of cost control on profitability of manufacturing companies in Bonaberi-Douala.

1.5.2 Specific Research Objectives

1. To examine the effect of budgetary control on profitability of manufacturing companies.
2. To evaluate the effect of standard Costing on profitability of manufacturing companies.
3. To assess the effect of activity-based Costing on profitability of manufacturing companies.