EFFECT OF INDIRECT COST ON THE FINANCIAL PERFORMANCE OF FIRMS IN NIGERIA

ABSTRACT

The main objective of the study is to examine the effect of indirect cost on the financial performance of firms in Nigeria. This study adopts ex-post facto research design which involves the ascertaining of the impact of past factors on the present happening or event and the research work adopts the secondary source of data in obtaining all the data needed for the study. The descriptive statistics is used to summarize the collected data in a clear and understandable way using numerical approach. The multiple regression technique using ordinary least square regression (OLS) method is adopted in investigating the relationship between the dependent and independent variables. In line with the first specific objective which was set to examine the effect of cost of rent on the profitability of listed firms in Nigeria, hypothesis was tested and the result revealed that cost of rent has no significant effect on the profitability of listed firms in Nigeria. In conclusion, we can see that cost of rent has a positive insignificant effect on the profitability of listed brewery firms in Nigeria and that salaries & wage has a negative significant effect on the profitability of listed brewery firms in Nigeria. I therefore recommend that listed firms in Nigeria should incorporate a cost reduction policy that enables cost efficiency and effectiveness these will enhance the profitability of the firms.

TABLE OF CONTENT

Title page                                                                                                    i

Declaration                                                                                                ii

Certification                                                                                      iii

Dedication                                                                                                  iv

Acknowledgements                                                               v

Table of Contents                                                                                        vi

Abstract                                                                                                        ix

CHAPTER ONE: INTODUCTION

1.1 Background to the study                                                             1

1.2 Statement of the problem                                                     2

1.3 Objective of the study                                                           3

1.4 Research question                                                                                  4

1.5 Research hypothesis                                                                             4

1.6 Significance of the study                                                       4

1.7 Scope of the study                                                                      5

1.8 Limitations of the study                                                       5

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework                                                 7

2.1.1 Concept of indirect cost                                                                8

2.1.2 Cost of classification                                                            10

2.1.3 Cost behavior                                                           12

2.1.4 Costing systems and costing methods                                        16

2.2 Theoretical Framework                                                    18

2.2.1 Kaizen costing theory                                                            18

2.2.2 The trade-off theory                                                       19

2.3 Empirical review                                                               19

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research design                                                                        26

3.2 Population of the study                                                         27

3.3 Sample size and sampling technique                                         27

3.4 Source of data                                                                          27

3.5 Data analysis technique                                                               27

3.6 Definition of Variables                                                       28

3.6.1 Independent variable                                                      28

3.6.2 Dependent variable                                                        28

3.7 Model specification                                                          28

3.8 Limitation of the methodology                                                      29

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Data presentation                                                                    30

4.2 DATA ANALYSIS                                                                    30

4.2.1 Data validity test                                                                  30

4.2.2 Descriptive statistics                                                                 31

4.2.3 Regression of the estimated model summary                            32

4.2.4 Regression results                                                             34

4.2.5 Test for research hypotheses                                           35

4.2.5.1 Test for research hypothesis one                               35

4.2.5.2 Test for research hypothesis two                                  35

4.2.5.3 Test for research hypothesis three                                35

4.3 Discussion of findings                                               36

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of findings                                              38

5.2 Conclusions                                                                    38

5.3 Recommendations                                                        39

5.4 Limitations of the study                                                  39

5.5 Suggestions for further research                                40

References                                                                                 43

Appendices                                                                    

CHAPTER ONE

INTRODUCTION

1.1  Background To The Study

The main goal or objective of any business organization according to Lucey (1993) is to make and maximize profit while other secondary objectives include going concern, growth, corporate social responsibility, benefits to employees and so on. Lucey (1993) opines that a business objective is the starting point for any business organization to thrive and it provides direction for action. It is also a way of measuring the effectiveness or otherwise of the actions taken by the management of the organization. Though other objectives are also considered very important as listed above, but profit maximization is usually the ultimate because it maximizes the shareholders wealth which is the ultimate aim of investing in a business. People will naturally prefer to invest in a highly profitable business (Charles, 1998). Therefore, in the long run only the profit maximizers survive in the business environment.

However, for proper profit to be recorded from a business there is a need for adequate control of cost. As stated in Robert (2007) a company with adequate cost structure possess the higher chance of attaining its profit target. Innes, John, Mitchell and Sinclair (2000) assert that the survival triplet today for any company is how to manage product/service cost, quality, and performance. The shareholders are demanding a required rate of return on their investment from the company. Thus cost has become a residual. The challenge is being able to manufacture products or provide services within the acceptable cost framework. Innes, John, Mitchell and Sinclair (2000) concluded in their study with a recommendation that cost has to be managed in an ongoing and continuous improvement activity within the company so as to enhance profitability and survival.

Due to growing competition on globalized markets, companies need the more accurate information about the profitability of their products, customers or markets. All these problems carry higher need for understanding of the consumed costs by different activities and other different areas where the costs play the important role. This change in the business environment is associated also with the suitable change of structure and organization of company activities and structure of products. The importance of these problems has significantly increased during the economic crisis, because many enterprises in the world reduced their performance due to high untraceable cost.

1.2  Statement Of The Problem

There have been substantial research efforts made by different scholars using different approaches  in determining what seems to be the optimal cost reduction strategy or trying to explore the theories of indirect cost for firms and the effect on the reported profit, yet there is no universally accepted findings, for example:

Okwo and Ugwunta (2012) studied the impact of input costs on firm profitability of the breweries industry in Nigeria. The study adopted the ratios of selling and general administrative expenses, cost of goods sold (inventory), receivables, payables and depreciation as independent variables; and profitability as dependent variable. Using Ordinary Least Squares and multiple regression techniques, they among others found that general administrative expenses (overhead) had no significant relationship with profitability while, Ezekiel, Michael and Solomon (2014) investigated the relationship that exists between cost management practices and firm’s performance in the manufacturing organizations using data from 40 manufacturing companies listed on the Nigeria stock exchange during the period of 2003 to 2012. Four hypotheses were formulated for the study and tested using t-statistic. The study relied on secondary data extracted from the audited financial statement of the selected companies. Direct material cost, direct labour cost, production overhead cost and administrative overhead cost were taken as independent cost management variables while profitability (Operating profit) was taken as dependent variable representing the firm’s performance. The result indicates that a positive significant relationship exists between cost management practices and firm’s performance in the manufacturing organization. It is therefore recommended that a cost reduction strategy with emphasis on production overhead cost and administrative overhead cost should be embarked upon if their profit maximization and wealth creation objective must be achieved.

In regards to this contradicting findings of authors on the effect of indirect cost on the financial performance of firms in Nigeria, there is a need for a further research to be carried out to ascertain the effect of indirect cost on the financial performance of firms in order to fetch of more findings than the already existing one thus given rise to my research

1.3 Objectives Of The Study

The main objective of the study is to examine the effect of indirect cost on the financial performance of firms in Nigeria and its specific objectives include to;

i.               examine the effect of Cost of Rents on the profitability of listed firms in Nigeria.

ii.              ascertain the Effect of Salaries and wages on the profitability of listed firms in Nigeria.

iii.            examine the effect of Administrative expenses on the profitability of listed firms in Nigeria.

1.4 Research Questions

The following research questions are set to be answered during the study;

i.               What is the effect of cost of Rents on the profitability of listed firms in Nigeria?

ii.              To what extent does Salaries and wages affect the profitability of listed firms in Nigeria?

iii.            What is the effect of Administrative expenses on the profitability of listed firms in Nigeria?

1.5  Research Hypotheses

The following research null hypotheses are set to be tested during the course of the study;

H0₁: Cost of Rents has no significant effect on the profitability of listed firms in Nigeria

H0₂: Salaries and wages have no significant effect on profitability of listed firms in Nigeria.

H0₃: Administrative expenses have no significant effect on the profitability of listed firms in Nigeria.

1.6 Significance Of The Study

This study is of immense importance to management of business organizations, owners, potential investors, government and individuals. Management of business organization shall be made to know and understand the cost management practice of firms in Nigeria. More so, owners of business organization will be made to understand the need to form a formidable Cost reduction policy for their business to enhance its profitability.

The government and other individual investors will be made to know the importance of contributing to ease off cost of the firms as this will make them to benefit from the profitability of business organization they have stake in.

Finally, the students, academia and other prospective researchers who desired to carry out further research on similar related topics will find this study of immense important in the sense that it will serve as a reference point.

1.7 Scope Of The Study

This study specifically restricts itself to the brewery manufacturing sector as a result of it been one of the sector with the highest record of sales volume and consistency on the Nigerian stock exchange (NSE) market, this study covers all the 8 listed brewery firms on the NSE.  The scope of this study in relation to time covers a period between 2010-2015 (i.e. a period of six years) in regards to the availability of financial statements to be used during the course of this work. 

1.8 Limitations Of The Study

Although this study will be scientifically carried out, there will still be potential limitations of the study that should be taken into consideration.

The current research is restricted only to the listed manufacturing firms. Furthermore, this research will mainly be conducted based on secondary data collection. The other data collection methods will not be considered. As a result they may not be 100% accurate. In addition to these, data representing the period of 2010 to 2015 will be used for the study. The research will compiled a large database of listed manufacturing firms accounting data that demonstrate what will be done even with the limitations of currently available data.

More so, the data that will be used in this study were prepared on a historical basis which is one of fundamental problem associated with presenting accounting information. This thus makes it impossible for current causation to be inferred. However, the use of regression analysis which will try to establish causation effect between the dependent and independent variables in the analysis of data will help to validate this study’s findings to greater extent.

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