CHAPTER ONE

INTRODUCTION

This initial chapter provides a broad overview of the basis of the study. It covers the background of the study, the statement of the problem, research questions, and objectives of the study, research hypothesis, and the significance of the study as well as the organization of work.

1.1 Background to the Study

Before the Industrial Revolution in the sixteenth and seventeenth centuries there was no need for cost control as Companies focused basically on production, trade and high profit margins. This was because there was no real and fierce competition and the indirect costs within the Companies were very controllable.

In the twentieth century, Companies started to pay more attention at the continuity of the business. This could be done by keeping costs as low as possible through the use of various cost reduction strategies such as the massive layoff of workers. However, these cost reduction strategies did not yield any good results as indicated in the chainsaw A1 episode1. Today, one of the biggest challenges facing business undertakings the world over is controlling cost. With increased competition, due to liberalization, the growth of international business, the wide possibilities of doing business through the internet and increases in indirect costs, business undertakings; especially manufacturing Companies are under increasing pressure to find ways to become more efficient. Business undertakings must be focused on competitiveness, keeping costs as low as possible and using their resources in the most productive manner if they want to increase profits and attract investors.  

In Africa for instance, there is so much uncertainty in the business environment. There are so many factors that hinder firms from the realization of their profit motive. Such hindrances include; the enormously large rate of inflation, low capacity utilization and intense foreign competition. Because of the afore-mentioned reasons, many firms struggle to maintain satisfactory earnings in an environment where costs are rising but price increases are becoming more and more difficult to achieve. 

As a way of enhancing economic competitiveness, maintain improved profitability to remain afloat in the market place of the business, many manufacturing firms in Africa now adopt one measure or the other aimed at controlling costs and maximizing profits. Managers, Accountants and Bankers therefore have to work together to come up with smart strategies that can enable them to cope with the competitive nature of the global environment which is more turbulent and hostile than ever before.

Referring to Cameroon as a case in point, after the economic crisis the country experienced in the early 1990s, the government put in place many measures to revive the economy so as to foster economic growth, reduce unemployment and poverty by liberalizing both the political and economic sectors of the country. Thanks to this, many small and medium sized businesses were created. Despite this creation, many of the businesses have closed down due to intense competition, mismanagement of funds and poor cost control systems. Some of these businesses have not been able to operate for up to 15 years talk less of the 99 years set by the OHADA Uniform Act on Commercial Companies and Economic Interest Groups.

Cost and profit are two elements that determine the financial position of any business undertaking. Since management is very much concerned with profitability, which is a very important measure of business performance especially in a manufacturing concern, the need for higher sales will arise and this will facilitate the need to increase production capacity, which in turn brings about increase in cost. Ian (2008) is of the opinion that cost should be controlled rather than embarking upon unscientific cost reduction strategies that may result in lowering the quality of the product. Management is then forced to adapt various methodologies and techniques in order to control rather than reduce cost.

For manufacturing Companies to control their costs, they have to be able to understand and influence these costs. To understand costs and make decisions that have an immediate impact on the Company’s bottom line (net result), an accurate accounting system that provides reliable and relevant costs information is the base. Cost information is of great value to management decision (Lucey, 2002). This is supported by Anderson and Sollenberger (1992), which states that Cost accounting, provides information to management about whether a company is utilizing its resources effectively or not.

As accounting systems allow cost information to be captured, these costs can be kept in check through the use of a cost control system. To Sikka (2003), a cost control system consists of methods and procedures that help to regulate the cost of operating an undertaking and ensure that cost do not go beyond a certain level. To this, Robert et al.. (2011) adds that every company is different, and a common cost control system cannot be designed to fit every business. The system will depend on the nature of the business and the product(s) manufactured and must also suit the operations of the Company. Hence the control system to be used by a bakery, a soap factory or a printing press will be different since the cost structures are also different. 

In the opinion of Hamilton & Martha (1995), Cost control is a continuous process which starts with the establishment of standards or targets. As the fiscal year progresses, management compares actual results to those projected and incorporates into the new plan the lessons learnt from the current operations. Through standard costing and the budgetary control process, management establishes overall objectives, defines responsibility centres and the specific objectives for each of the responsibility centres not leaving out the procedures and standards for reporting and evaluation. As such, the concept of relative control is stressed. As profitability amongst others is the essence of any business, there will be the need to incur reasonable cost and management has the obligation to ensure the careful and efficient use of resources to achieve set standards. This will help to reduce persistent losses which are a big threat to the going concern3 of the business entity.

Business undertakings are compelled to control costs in an effective manner, make more profits and be able to cope with the high level of competition in the world today. Even as individuals, making maximum use of our limited resources to satisfy our needs and wants is an issue that cannot be ignored. We become very conscious about how much we spend on basic household needs (food, shelter and clothing), transportation, healthcare, education and recreational facilities amongst others. We therefore try as much as possible to minimize any wastage of our scarce resources.

It is on the basis of this background that the study aims at discussing how cost control could be effectively administered to regulate expenses so as to bring about increased returns in terms of profitability.

1.2. Statement of the Problem

The rising cost of doing business in Cameroon has been of utmost concern to businessmen and the citizens. Prices of goods and services keep fluctuating such that many local producers have to struggle to cope with their foreign competitors. This has resulted in constant reductions in corporate profits and the closure of many businesses.

Looking at the case of bakeries in Bamenda, available statistics for the 2011 and 2014 financial years gotten from the Regional Tax Centre for the North-West Region indicates that they were twenty registered bakeries in existence within this area as at 2011. However, it is realized that barely three years later (2014); fourteen of these bakeries had closed. This shows that the rate of failure by bakeries in this area is very high compared to the potential for success.  

To avoid the same fate, most of the bakeries that are currently operating have resorted to cost control. However, the mechanisms of cost control have been criticized for not being effective. This opinion is based on the fact that reports from these bakeries show that costs keep rising even without corresponding increases in activity levels. This is as a result of the fact that, managers have either failed to identify the appropriate perspective from which cost could be effectively controlled, or because employees who are the major contributors in the cost control process are not very clear about cost control measures and their effects. Consequently, their support for cost control is not optimal within the business. This situation has resulted in poor performance as far as profitability is concerned.

The use of an effective cost control system is needed to arrest the situation, and this is precisely what this study aims at achieving.

1.3. Research Questions

1.3.1. Main Research Question

How can cost control mechanisms be effectively administered to regulate expenses so as to bring about increased returns in terms of profitability? 

1.3.2. Specific Research Questions

• To what extent do bakeries in Bamenda operationalize budgetary control and standard costing?
• What is the relevance of variance analysis to these Bakeries? • To what degree are the constraints of inventory and operating expenses managed by these Bakeries?
• What is the correlation between cost control and the profitability of a business?

1.4. Research Objectives

1.4.1. Main Research Objective

To ascertain how control cost mechanisms can be effectively administered to regulate expenses, and so bring about increased returns in terms of profitability.

1.4.2. Specific Research Objectives

• To determine the extent to which bakeries in Bamenda operate budgetary control and standard costing.
• To examine the relevance of variance analysis in these bakeries.
• To find out the degree to which the constraints of inventory and operating expenses are being managed by these bakeries.
• To investigate the relationship between cost control and the profitability of a business.