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Product Category: Projects
Product Code: 00007528
No of Pages: 110
No of Chapters: 1-5
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ABSTRACT
Cost management is one of the most significant strategies in company performance and financial management which any successful firm, especially manufacturing firms have to effectively manage in periods of sales revenues decline, as well as during periods of sales growth. Hence, managing cost of production for manufacturing companies in Nigeria is at the focal point of present day management teams. Manufacturing companies in Nigeria compete in a highly turbulent environment and managers are constantly seeking for cost reduction systems to implement so as to enhance financial performance of their respective companies. This empirical study evaluated the effect of input cost on financial performance of quoted manufacturing companies in Nigeria by adopting and implementing the Kaizen Costing System. To this end, the study employed secondary data, based on Ex-post facto research design and made use of a Panel Data set collected from forty-two (42) quoted manufacturing companies in the Nigerian Stock Exchange for the financial periods 2010 to 2017. The independent variables employed for the study were Direct Cost, Finance Cost, Operating Cost, Monitoring cost, Firm Size, Financial Leverage and financial performance dependent variables included: Sales Growth, Economic Value Added, Market Price per Share and Net Assets Value per Share. The data collected were analyzed using analytical software: Stata version 13 to conduct the descriptive statistics, correlation, and regression analysis. The study found that: As regards Finance Cost, there is no statistical effect on Market Price per Share, Sales Growth, and Economic Value Added but as regards Net Assets Value per share, Finance Cost is positive and statistically significant at 5%. For Direct Cost, there is no statistical effect on Market Price per Share, Sales Growth, and Economic Value Added but concerning Net Assets Value per Share, Direct Cost is negative and statistically significant at 5%. Concerning Operating Cost, there is no statistical effect on Market Price per Share, Sales Growth and Economic Value Added but as regards Net Assets Value per Share, Operating Cost is negative and statistically significant at 5%. There is no statistical effect of Monitoring Cost and Firm Size on all variants of performance variables used in the study. As regards Financial Leverage, there is no statistical effect on Market Price per Share and Sales Growth. However, pertaining to Net Assets Value per Share and Economic Value Added, Financial Leverage is negatively and positively (respectively) and statistically significant at 5% levels. Hence, this study recommends that Managers of manufacturing companies in Nigeria should adopt and implement the Kaizen Costing System to complement existing cost reduction techniques so as to strengthen their cost reduction and financial performance possibilities in the present day global market place. The need for managers of the manufacturing sector in Nigeria to adopt and implement the Kaizen Costing System alongside existing cost reduction techniques is even more crucial as Nigeria advances to become one of the top 20 economies in her Vision 2020 Agenda. Specifically, the present study recommends that management of manufacturing companies in Nigeria should adopt and implement the Kaizen Costing System alongside the corporate Kaizen Culture so as to reduce Cost of Operations and Direct Cost to curb the negative effect they have on Net Asset Value of the firm. Furthermore, improvement in Net Asset Value per Share supports vital strategies that will maximize Financing Cost.
TABLE OF CONTENTS
PAGE
Front Cover Text i
Title Page ii
Declaration iii
Certification iv
Dedication v
Acknowledgements vi
Table of Contents vii
List of Tables x
Abstract xi
CHAPTER 1:
INTRODUCTION 1
1.1
Background to the Study 1
1.2
Statement of the Problem 4
1.3
Objectives of the Study 6
1.4
Research Questions
6
1.5
Research Hypotheses
7
1.6
Significance of the Study
7
1.7
Scope and Limitations of the Study 9
1.8
Definitions of Terms 10
CHAPTER 2: REVIEW OF RELATED LITERATURE 12
2.1
Conceptual Review 12
2.1.1
Firm input cost 12
2.1.2
Firm financing cost 16
2.1.3
Firm direct cost 19
2.1.4
Firm operating cost 19
2.1.
5 Firm monitoring cost 22
2.1.6
Firm size 25
2.1.7
Firm financial leverage 25
2.1.8
Firm profitability 25
2.1.8.1
Economic value added (EVA) 27
2.1.8.2
Sales growth 28
2.1.8.3
Market price per share (MPS) or Share price 29
2.1.8.4
Net assets value per share (NAVPS) or Book value per share 30
2.2
Theoretical Frame Work 31
2.2.1
Kaizen costing system 31
2.2.2
Cost management and efficiency theory 33
2.2.3
Agency theory 34
2.3
Empirical Review of Literature 36
2.5
Gap in Literature 51
CHAPTER 3: METHODOLOGY 58
3.1
Research Design 58
3.2
Sources of Data 58
3.3
Population Size 58
3.4
Sample Size and Sampling Techniques 59
3.5
Data Analysis Techniques 60
3.6
Variable Measurement and Model Specification 61
3.6.1
Dependent variables 61
3.6.1.1
Economic value added (EVA) 61
3.6.1.2
Sales growth 61
3.6.1.3
Market price per share (MPS) 61
3.6.1.4
Net assets value per share (NAVPS) or Book value 62
3.6.2
Independent variables 62
3.6.2.1
Direct cost 62
3.6.2.2
Financing cost 62
3.6.2.3
Operating cost 62
3.6.2.4
Monitoring cost 62
3.6.3
Control variables 62
3.6.3.1
Firm size 63
3.6.3.2
Firm financial leverage 63
3.7
Theoretical Specification of Regression Model 64
3.8
Model Specification 65
3.9
Test of Statistical Significance 66
CHAPTER 4: DATA PRESENTATION/ANALYSIS AND DISCUSSION 67
4.1:
Descriptive Statistics 68
4.1.1
Data normality test 70
4.1.2
Pearson correlation statistics test 71
4.1.3
Test for multicollinearity with variance inflation factor (VIF) 73
4.1.4
Test for heteroskedasticity 74
4.2
Results 75
4.2.1
Hypothesis testing 76
4.2.2
Discussion of findings 79
CHAPTER
5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
81
5.1
Summary of Findings 81
5.2
Conclusion 82
5.3
Recommendations 82
References 85
Appendices
LIST OF TABLES
2.1 Brief review of empirical literature on input cost
and financial performance
53
3.1 List of quoted manufacturing companies on NSE as
at Q4 2017 and samples drawn 60
3.2 Variables: Definitions, measurements and sources 63
4.1 Summary of descriptive statistics and analysis
results 68
4.2 Data normality test results 71
4.3 Correlation matrix 72
4.4 Variance inflation factor test 73
4.5 Heteroskedasticity test results 74
4.6 Panel data estimation techniques results (Fixed
effect and random effects)
76
CHAPTER 1
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The importance and effect of organizations input cost on firms’ financial performance especially among large companies cannot be undermined and has raised a lot of anxiety recently within the global market place especially since most global economies are still reeling or recovering from the financial crises and corporate failures experienced in the last decade (Ogbadu, 2009). Despite this anxiety, certain factors such as direct cost, financing cost, and operating cost, continue to exert pressure on the financial performance of firms, particularly manufacturing firms globally (Ola, 2001). According to the World Economic Forum (2013) (as cited in Oburota & Ifere, 2017), the manufacturing sector not only adds value to the overall economic growth but also creates more jobs than any other sector of the economy.
For any firm to sustain its objective of going concern, it should be able to generate enough revenue to cover its operating costs and make enough profit as compensation to shareholders. Hence, in the context of the relationship between a firm’s financing structure and its financial performance, agency costs surfaces, which results from the conflicts of interest between shareholders and managers. Debt financing raises the pressure of managers to perform but implies that interest payment obligations must be satisfied by the firms' agents, since the company may come under the threat of bankruptcy if these obligations are not satisfied. Little wonder why several studies support a positive effect of debt financing on corporate profitability (Jensen & Meckling, 1976)
Etale and Bingilar (2016) noted that a developing and significant input cost confronting Nigerian brewery companies is inefficient cost management of raw materials costs, work in progress costs, spare parts or consumables, goods in transit and finished products with negative influence on the profitability of brewery firms in Nigeria. Generally, essential decision-making functions at critical stages of the manufacturing process for most successful firms are inventory cost management. Inventory represents a substantial part of the total current assets of many firms and usually represents about 40% of the capital of industrial organization (Moore, Lee & Taylor, 2003). Similarly, in situations where costs, including inputs costs, are too high, profitability and share prices are negatively affected due to low-profit margins and to succeed against competitors is difficult (Abdul & Isiaka, 2015). According to Dome, Kuznetsov and Nkansah-Gyekye (2015), cotton production in Tanzania has been susceptible to the fluctuations of input prices (seed costs, pesticide costs) leading to decreased or increased input costs with attendant adverse effects of life sustainability of cotton farmers and the Tanzanian national economy.
In early 1990s, the total production capacity for 33 brewery companies in Nigeria was about 20 million hectoliters. However, in 2012, 88% of brewery firms in Nigeria were not functional due to the growing tendency of input costs (Okwo & Ugwunta, 2012). As of 1Q 2019, only four brewery firms were quoted on the Nigerian Stock Exchange (Nigerian Stock Exchange Fact Book, 1Q 2019). A significant factor contributing to the extinction of these manufacturing firms is the unrelenting rising trend of input costs within the manufacturing sector of the Nigerian economy. The incessant shutting down of brewery companies as a result of high cost of inputs deters the economic growth and development of Nigeria (Okwo & Ugwunta, 2012).
The economic benefits of the manufacturing sector are sustained when manufacturing firms make a profit that safeguards their continuing in business. Equity Research Report (2006) thought that the main threats to manufacturing firms in the Nigerian included the rising cost of petroleum products and cost of raw materials such as barley which was imported with high excise costs. According to Xia and Buccola (2003), the wage rate rose comparatively with both capital and material prices until 1980. After that, wages fell relative to capital but continued to rise relative to material prices. Despite the unprecedented increases for price and exports of U. S. wheat in 2007 and 2008, profit margins for wheat producers in U. S., over the same period, remained very low because of rapidly rising prices for input costs such as energy, natural gas, and transportations costs (Ali & Vocke, 2009).
Vural
and Efecan (2012) documented that Turkish agricultural share in employment
declined from 50% in 1980 to 25% in 2009 and the farm sector contribution to the GDP also declined from 23% to 8.3%
over the same period primarily due to rising energy and input costs for maize
production in Turkey. Similarly,
Akdemir, Akcoaz and Kizilay (2012)
documented that the agricultural sector has become increasingly dependent on
energy resources, and the continuous rise in input costs such as electricity,
fossil fuels, chemicals, and fertilizers
has negatively affected the profit margins of apple production in Turkey. However,
in a developing society such as Nigeria, Ogbadu
(2009) emphasized the danger of a perpetual increase in input cost among
manufacturing companies. Hence, in a bid
to understand as well as provide probable solutions to the previous issues, this study tends to find out
the effect of firms input cost as it relates to financial performance among
quoted manufacturing companies in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Globally, the manufacturing sector has become progressively significant to the development and growth of both developing and developed societies. Hence, appropriate consideration should be given to the relative importance of input costs and the operational activities of manufacturing firms to develop appropriate measures to mitigate the devastating effects of rising input costs on the financial performance of manufacturing firms. According to Ogbadu (2009), a significant challenge confronting manufacturing companies in Nigeria is the growing trend of input and operational costs. According to Gatsi, Gadzo and Akoto (2013), input costs which are economic resources or factors of production refer to the firm's expenditures incurred to create a product or service obtained from direct materials, direct labor and factory overhead.
Rising input and operational costs result in the erosion of profits of manufacturing companies in Nigeria, thereby leading to shutdowns and in some extreme cases, a complete collapse of manufacturing firms (Ogbadu, 2009). In 1990, the number of breweries in Nigeria was about 33 with a total production capacity of 20 million hectoliters, however, as of 2012, only four breweries were operational (Okwo & Ugwunta, 2012). With the closure of 88% of breweries in Nigeria in 1990, one can only imagine the number of jobs that lost as a result of this economic disaster. These statistics are even more alarming when one considers the fact that as at 1990, the Nigerian brewery industry directly employed about 30,000 employees with additional indirect jobs of about 300,000 provided through auxiliary services (Okwo & Ugwunta, 2012). The poor performance of the Nigerian manufacturing sector is mainly attributed to the high prices of input costs.
The slow growth of the Nigerian manufacturing sector leads to weak economic growth. According to the National Bureau of Statistics, the Nominal contribution to Gross Domestic Product (GDP) by the Nigerian manufacturing sector in 1st Quarter 2019 was 36.45% while the Real GDP contribution was 0.81% (National Bureau of Statistics, 2019). The overall GDP contribution of the Nigerian manufacturing sector in the 1st Quarter of 2019 was only 9.80 % (National Bureau of Statistics, 2019). The implications here are that the manufacturing sector contributed a meager 9.80% to Nigerian GPD while the non-manufacturing sectors contributed 90.20%. The reverse should be the case. Given the above statistics, the Nigerian manufacturing sector is not performing like her global counterparts. Manufacturing subsectors have the most significant multiplier effect of any economic sector. Jobs and ripples across the economy are created, growth in other sectors of the economy are possible through manufacturing investments. Weak economic growth causes sub-standard national development, loss of jobs, and the creation of social problems such as unemployment within the Nigerian economy. The connection between a flourishing manufacturing sector and economic growth is a direct and important one, especially concerning employment and industries that are themselves connected (World Economic Forum, 2016).
The
primary objectives of a corporation are profit maximization and growth of
shareholders’ value. However, these
objectives can only be achieved through increased sales, increased production
capacity, which in turn will require a decrease in input costs. The decline
in profits for manufacturing firms in Nigeria is counterproductive to economic growth and development of the Nigerian economy. There is a disconnect between the
manufacturing sector and the economic growth of Nigeria, especially concerning employment and related
industries. Though numerous factors are linked with the erosion of corporate
profits within the manufacturing sector of the Nigerian economy, the difficulty
of curtailing high input and operational costs appear as common threads
Sivathaasan, Tharanika, Sinthuja and Hanitha, (2013); Siyanbola and Raji
(2013); Okwo and Ugwunta (2012) and Okwo, Ugwunta and Okelue (2010). Extant literature
reviewed showed different empirical strategies and have produced contradictory
results. Hence the study aimed at
providing a more rigorous and robust solution to empirically examine the effect
of firm input costs on the financial performance of quoted manufacturing firms
in Nigeria.
1.3 OBJECTIVES OF THE
STUDY
The broad objective of the study was to examine the effect of
input costs on financial performance of quoted
manufacturing companies in Nigeria.
Specifically, the study sought:
1.4
RESEARCH QUESTIONS
This study sought answers to the following
questions:
1.5 RESEARCH
HYPOTHESES
Based on the research objectives, and to answer the
research questions of the study, the following null hypotheses were tested:
1.6 SIGNIFICANCE
OF THE STUDY
This study contributes to the knowledge and awareness
of cost management on financial performance of
quoted manufacturing firms in Nigeria. The study provides management,
practitioners, investors, and analysts the must-have tools to aid in making informed
business and investment decisions. Specifically,
the research is of immeasurable benefit to the following interested parties:
Management
and Practitioners
Managers are interested in internal quality controls, better financial
condition, and improved performance of
the firm. Awareness of
the findings of the present study improves the decision-making
capabilities of managers and practitioners.
Regulatory
Authorities
Regulatory and tax authorities are
interested in earnings and profitability of firms for policymaking and taxation of for-profit businesses. Findings of
the present research are expected to help regulatory authorities in
their decision-making processes. Improvement in regulations and decision
making in turn, leads to improved decision making by existing and potential
investors.
Bond Holders
Bondholders are interested in the appraisal of the firms’ capital
structure, which serves as the primary
sources of funds over time. The findings of this study is very beneficial
to bondholders when appraising the
capital structure, sources, and uses of funds for the firm and the firms’
profitability.
Shareholders
and Prospective Investors
The
benefits of analyzing the financial performance of listed manufacturing firms
for both current and prospective investors cannot be overemphasized. Investors (present and prospective) who are interested in the
present and expected future earnings, as well as the stability of the profits of the firm, will find the study findings
imperative in the course of their investment decisions
making. Investors are expected to use the
study findings to determine what constitutes a firms’ cost and in the
evaluation and assessment of financial statements before making investment
decisions.
Academicians and Researchers
This study contributes to the
already existing body of knowledge in the fields of cost management, input
costs behavior, financial performance, and
organizational profitability. Researchers are expected to use the findings
of this study as a basis for further research in these fields of
knowledge.
1.7
SCOPE AND LIMITATIONS OF THE STUDY
The research focused on finding the effect of input costs on financial performance of selected quoted manufacturing companies on the Nigerian Stock Exchange. The study was limited to 42 quoted manufacturing companies on the floor of NSE even though other manufacturing companies that were excluded from the study sample and others not listed on the floor of NSE were also players in the Nigerian market place. The research was restricted to firms that do not provide any form of financial service to the public. From the entire population of seventy-two (72) quoted manufacturing companies as of Q4 2017, the following samples were drawn. From the consumer goods sector, twenty-one (21) companies were quoted and twenty-one (21) companies were included in the sample; from the healthcare sector, ten (10) companies were quoted and six (6) companies were included in the sample; from the industrial goods sector, thirteen (13) companies were quoted, and twelve (12) companies were included in the sample, and from the natural resources sector, four (4) companies were quoted, and three (3) were included in the sample.
Sampled
quoted manufacturing companies were convenient and most accessible because they
had published complete and consistent financial statements for the eight (8)
year period (2010-2017) that corresponded to the variables of interest for the
period under consideration. The intent
of the researcher was not to sample all manufacturing companies from all 8
sectors categorized on the NSE Fact Sheet for Q4, 2017. Hence, the exclusion of manufacturing
companies within the Agriculture, Conglomerates, Construction/Real Estate and
the Oil and Gas sectors from the list of sampled manufacturing companies. Excluded from the sample were quoted manufacturing
companies from the agricultural sector (5), conglomerates (6), construction/real
estate (1) and oil and gas (12) because of incomplete and inconsistent data
that did not correspond to the variables of interest for the period under
study. The dependent variables for this
study were Economic Value Added (EVA), Sales Growth, Market Price per Share (MPS),
and Net Assets Value per Share (NAVPS). The independent variables included Finance Cost, Direct Cost, Operating
Cost, and Monitoring Cost. The control variables were Firm leverage and
Firm size.
1.8 DEFINITION OF TERMS
Direct cost: Wages
paid to operatives engaged in the production process.
Economic value added: Market
capitalization plus total liabilities minus cash.
Financing cost: The interest expenses of a company that uses interest-bearing
debt.
Firm financial leverage: The value of total
assets divided by total liabilities.
Firm profitability: The
surplus of firms’ incomes over input cost.
Firm size: Log
of total asset in thousands computed as
the natural logarithm of total assets.
Input cost: The
set of costs incurred to create a product or service and are related to direct
materials, direct labour, and factory
overhead.
Market price per share (Share price): This
is equivalent to one-year stock price returns computed in percentages: Current
year-end share price minus previous year-end share prices divided by the
previous year-end closing share price.
Monitoring
cost: This is the ratio of Directors’ cost to
revenue.
Net assets value per share (NAVPS) or Book value: Total
assets minus intangible assets minus liabilities.
Operating cost: The
sum of selling expenses, administrative expenses, distribution cost, marketing
cost, and staff cost and other costs that are not directly associated with the
production of goods and services.
Quoted companies: Companies
whose shares are publicly traded on a particular Stock Exchange.
Sales growth: Current
year sales minus prior year sales and the whole divided by previous year sales.
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