BREAK-EVEN THEORY AND ACCOUNTING AS
A MANAGEMENT DECISION A TOOL
(A CASE STUDY OF NIGERIAN HOECHST
PLC)
PROPOSAL
This
study is designed to analyze the Break-even theory and accounting as a decision
tool in manufacturing company. The
researcher will discuss the purpose and
the importance of the techniques that are in operations and practiced by the
company. It introduced the planning tool
called the Break-Even chart that will make a major impact to assist management
in profit planning, decision making and forecasting. It will also emphasizes on model of
development relating to Break-Even analysis.
Data for this research work will be
obtained through administering questionnaire through oral interview to the
senior staffs of some manufacturing companies, after which critical analysis
follows.
Regrettably however, the quest for
information will be hindered by time and money factors. Lectures will be going on in the class,
resources are scarce to travel wide and collect more information which would
enable the researcher to write extensively on the topic.
In conclusion therefore, the
researcher will suggest that Break-even techniques when applied, will help a
business in profit planning, decision making and forecasting.
TABLE OF CONTENTS
Cover page i
Title page ii
Approval page iii
Dedication iv
Acknowledgement v
CHAPTER ONE
INTRODUCTION
1.1 Background of study 1
1.2
Historical backgrounds of Nigerian
Hoechst
plc 2
1.3 Statement of problems 4
1.4 Objective of study 5
1.5 Significance of study 5
1.6 Hypothesis and research questions 6
1.7 Scope and limitation of study 7
1.8 Definition of terms 8
CHAPTER TWO
REVIEW OF LITERATURE
2.1 Literature review 10
2.2 Theoretical framework of studies 18
2.3 Model development 24
2.4 Tools of management accounting 48
2.5 Classification of decision 49
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction
3.2 Research approach 51
3.3 Sampling design and population size 52
3.4 Source of data 53
3.5 Interview questions 54
3.6 Method of data analysis 54
CHAPTER-PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
4.1 Analysis of data and interpretation 58
4.2 Hypothesis testing and proofing 63
CHAPTER FIVE
SUMMARY OF FINDING. CONCLUSION AND RECOMMENDATION
5.1 Summary of findings 68
5.2
Conclusion
5.3
Recommendation
Bibliography
Appendix
i
Appendix
ii
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND
OF STUDY
The success of a business is
generally attributable in great measure of the ability of its management
personal to cope with probable conditions of the future. Short
range as well as long-term plans must be made accomplished through sound
management evaluation. However, many
aids have been controlling and co-ordinating the function of their
business. One of the tool which
encompasses vital and needed information in guiding companies profit path is
the Break-Even theory. This is an
extension of marginal costing; basically.
It is concerned with the point at which revenue and costs intercedes,
hence the term “Break – Even”.
Break-Even system is a simple and
easily understandable method of picturing to the management the effect of
changes in volume on profits. It
predicts the effects of managerial actions today on future profits and company
survival. Business people do not view
costs outputs and profits may be affected by their actions. With the aid of Break-Even theory, they will
be able to understand more and data revealed by the Break-Even analysis. This system involves the marshalling of the
cost – volumer – profit data and other data to guide manager in its day-to-day
decisions. Some of the data are best
seen in a chart form for management to get a perspective view of the profit
structure.
Moreover, at the beginning of the
century a planning tool was developed by WALTER RAUTENSTRAUCH called the
Break-Even chart. This development made
a major contribution as a management aid in profit planning, forecasting and
decision-making. The concept show the significance in a firm between it’s costs,
volume and relationship between the costs, illustrate the relationship between
the cost, that-the selling price is
constant irrespective of the volume.
1.2 HISTORICAL BACKGROUND OF NIGERIA HOECHST PLC
On the 18th of December, 1963 the company was formed
under the name “Hoechst Nigeria limited”.
The company was registered as a private limited liability company with an authorized share capital of $10000
divided into 100 ordinary shares of $1 each on the 10th of January,
1964.
August 4th, 1971 the PVA
plant at Ikeja commissioned for use. The
major and company sold their 40% shareholding to E.O Ashamu and sons (holdings)
Ltd. The same day the name of the
company was change to “Nigerian Hoechst.
The authorized share capital was
increased to N2 million by the creation of additional 600,000 ordinary shares
of N2 each in 1977. On October, 1978 the
paid – up capital was increased to N3 million by public issued of N1 million
which implies that the whole authorized capital of the capital issued and fully paid-up. A, year later, Nigerian Hoechst shares were
quoted on Nigerian stock Exchange at 30K per share of 50k.
The pharmaceutical factory and central
warehouse at Ottah was commissioned on November 4th 1982. Three years after, the authorized share capital
on the company was increased from N10 million to N15 million while the paid-up
capital increases from N7 million to N10.5 million by bonus issue of one
ordinary share for every two ordinary shares held. In 1991 the authorized share of the company was
increased from N15 million to N25
million by the creation of additional 20 million ordinary shares of 50k each
and paid-up capital increases from N14 million to N17.5 million by bonus issue
of one ordinary share for every four ordinary shares held.
Nigerian Hoechst Plc has been engaged
in pharmaceuticals and industrial chemicals for years. The pharmaceutical factory is located at Otta
while the PVA (Industrial chemical Division) is located at Ikeja. Among their pharmaceuticals in market are the
reformulated Daga, Tabalon (an
anti-rheumatic analgesics), fastaquine (a malaria preventive), Tarivid and
Lasix etc.
However, Nigerian Hoechst Plc is also
engaged in high quality textile dyes, veterinary products, herbicides and
paints pigments. The registered office
is situated at Ikeja.
1.3 STATEMENT
OF PROBLEMS
The research is borne out of the
belief that Break-Even accounting technique is very vital to any form of
business organization. The analysis can
be made for various conditions to reveal profitable, less profitable and
unprofitable proposals; it is important to note that it brings home to management. Dramatically the basic need to
bring to light and the necessity of the significance of controlling costs and
increasing in sales will not solve the
problems and not be used as anacea for profit.
Management in the cause of analyzing the company data in disclosing the
company’s future profit structure few have the knack of quickly calculating the
effects of alternative course of action and such calculations eat into high
priced executive time. Even they care
frustrated in their attempts to use the conventional Break-Even techniques
approach. However, among the complaints
of the pressing issues that poses difficult are:
i.
Ineffective decision of determining the profit of a
particular product.
ii.
Unfavourable volume of output
to aid in fixing the budgeted sales
iii.
Indecisive profitability of the
various segments of the business
iv.
Inability of fixed price of the
product.
v.
Insensitive to the selection of
the most profitable mix
vi.
Inability to decide on the
volume of sale that will cover a reasonable return on capital employed
vii.
Lack of poor cash involved on
obtaining a particular volume of output of the product.
1.4 OBJECTIVES
OF STUDY
The Break-Even theory and accounting
technique portrays to management what the profit structure of their company is
now and what it could become in the future under various proposed
alternatives. Some of the objectives
are;
i.
Validating the cash crunch
involved in obtaining a particular volume of output of the product
ii.
Assessing the fixed price of
the product
iii.
Making a careful consideration
on the columns of output to aid in fixing the budgeted sales.
iv.
Deciding on the volume of sales
that will cover a reasonable return on capital employed.
v.
Analyzing the profitability of
the various segment of the business
vi.
Evaluating the decisions of
determining the profit of a particular product.
vii.
Selecting closely the most
profitable mix
1.5 SIGNIFICANCE
OF STUDY
This is the importance of the study and the benefits derived from
it, the following are the significance of the study. The study will:
i.
Identify the most profitable
mix
ii.
Discover the effective decision
tool in determining the profit of a particular product.
iii.
Show the profitability of the
various segment of the business.
iv.
Evaluate the economic
characteristics i.e. profit structure
v.
Ascertain the interplay of the
variables in the profit structure
vi.
Evaluate the future results of
proposed actions
vii.
Make a change on the volume of
sales to cover a reasonable return on capital employed.
1.6 HYPOTHESIS
AND RESEARCH QUESTIONS
Hypothesis is an assumption or a concession made for the sales of
argument in order to draw out and test its logical consequence.
This is
often in 2 forms:
i.
Null hypothesis- which is normally expressed as
the ideal situation (H0)
ii.
Alternative Hypothesis-
this is the converse of the Null Hypothesis (H1).
In carrying out this research work
these conceptual statements are made to serve as a guide on which the work will
be anchored.
i.
Ho: That volume is
the only relevant factor affecting cost
H1: Volume is not the only relevant factor affecting
cost.
ii.
Ho: The major
objectives of Break-Even techniques is profit planning and forecasting.
H1: the major objectives of Break-Even techniques is not
profit panning and forecasting
iii. Ho: variable unit cost does not
vary in production ot the volume of production and consequently total
production costs does not also change in proportion to the volume of
production.
H1: Variable unit cost vary
with the volume of production.
Generally statement of the Hypothesis
can be deduced thus; “That there is a significant relationship between the
major objectives of Break-even techniques as profit planning and forecasting
and the management approach
RESEARCH QUESITON
1.
Could a small amount of
expansion for the coming year be done economically and be co-ordinated with the
basic long-range plans for expansion?
2.
What is the certain rate of
return on investment in the product division and the total firm?
3.
Is the company striving to get
above average profit in the coming period when volume is expected to be
relatively high?
1.7 SCOPE AND
LIMITATION OF STUDY
The research attempts to give an
insight into the practice of Break-Even theory and accounting as a means of an
effective decision tool in the manufacturing companies.
Despite its limitation it discusses
the purpose and importance of the techniques, the or of technique in operation
and practiced by the company and the recommendation that will serve as a means
of decision tool to improve the system.
Also
in the comparison of the comparison of the company’s system with other
disparate manufacturing company in the same sector. The research work is limited ot the sample
frame under investigation.
1.8 DEFINITION
OF TERMS
The researcher finds it s worthy to define some important terms in
the research work for a better understanding of their meaning and.
i.
BREAK-EVEN: ANALYSIS: This is the term
given to the study of the interrelationships between cost, volume and profit at
various levels of activity, which produces neither profit nor loss.
ii.
MANAGEMENT ACCOUNTING: Is an integral
part of management, requiring the identification, generation, presentation,
interpretation and use of relevant information.
iii.
COSTS: These are operating expenses to
the business
iv.
REVENUE: is the income derived from
selling goods and services.
v.
MARGINAL COSTING: it distinguishes
between fixed cost and variable costs as conventionally classified