COST MANAGEMENT AND PROFITABILITY IN PRIVATE OWNED SCHOOLS
A CASE STUDY: MOTHERLANDACADEMYSECONDARY SCHOOL
By
NAKALANZI JULIET
07/U/11886/EXT
A RESEARCH REPORT SUBMITTED TO FEMA IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR A WARD OF DEGREE OF BACHELOR OF COMMERCE OF MAKEREREUNIVERSITY.
JUNE 2011.
1
DECLARATION
I, Nakalanzi Juliet hereby declare that this piece of work as entirely my effort and original work which has not been carried out by any body in whole or in part. I do acknowledge the work of other researchers.
Signed…………………………
Nakalanzi Juliet
07/U/11886/EXT
Researcher
Date:…………………………………..
APPROVAL
The research by Nakalanzi Juliet has been under my supervision and submitted for examination with approval of MakerereUniversity.
Signed………………..
MR. MBIDDE HENRY
DATE…………………..
DEDICATION
I dedicate this work to my beloved grandparents Mr. and Mrs. Eria Mwebe, my mother, aunties, uncles and friends. It has been their love and comfort that they gave me to accomplish this work.
ACKNOWLEDGEMENT
Very special tributes to the Lord God Almighty for enabling me complete this course. A particular acknowledgement and thanks to you my beloved friends Nampewo Lydia and Nantege Madina. I appreciate their constant interest, support and encouragement in completing this report.
I am also thankful to my supervisor Mr. Mbidde Henry who spent a lot of his time to make all the constructive criticisms and guidance in order to enable me produce this research report. May the almighty bless you sir.
I thank my family specifically my Mother Aunties and Uncles for the parental guidance they consistently gave me all through my studies.
Thanks goes to all my friends especially, NampewoLydia, Nantege Madina, Muwonge Joel, Ssonko Mike, Mawejje Phillip, Mukasa Fred, Bob and Kiganda. I would like to thank the management and staff of Mother land AcademySecondary School for having granted me access to their school.
TABLE O F CONTENTS
DECLARATION
APPROVAL
DEDICATION
ACKNOWLEDGEMENT
LIST OF TABLES
LIST OF ABBRAVIATIONS
ABSTRACT
CHAPTER ONE
1.0Introduction
1.1Background of the study
1.2Statement of the problem.
1.3Purpose of the study
1.4Objectives of the study
1.6Scope of the study
1.6.1Content Scope
1.6.2Geographical Scope
1.6.3Time Scope
1.7Significances of the study.
CHAPTER TWO
LITERATURE REVIEW
2.0Introduction
2.1Cost Management
2.1.1Need for cost management
2.1.2Cost Management goals and objectives
2.1.3Limitations of cost management
2.2Profitability
2.2.1Profit Measurements
2.3Cost Management and Profitability
CHAPTER THREE
3.0Methodology
3.1Introduction
3.2Research design
3.3Study population
3.4Sample size
3.5Sampling methods
3.6Data collection methods
3.7Sources of data
3.8Data processing and analysis
3.9Problems encountered
CHAPTER FOUR
4.0PRESENTATION, INTERPRETATION AND ANALYSIS OF THE FINDINGS. ……………………………………………………………………………………
4.1Introduction
4.2.1General findings of the study
4.2.2Findings on personal data
4.2.3Marital status of the respondents
4.2.4On the education levels of the respondents.
4.2.5Period worked for the school
4.2.6Position held in the school
4.3Findings on cost management
4.3.1Findings on the extent to which the respondents agreed or disagreed with the employment of staff with appropriate skills and experience
4.3.2Respondents on the right number of people employed in the school.
4.3.3Findings on the extent to which the respondents agreed or disagreed with the buy of school items only when they are headed.
4.3.4Findings on the extent to which the respondents agree or disagree with the proportionality of salary scale to the level of income.
4.3.5Measures to counter fees defaulters
4.3.6Findings on the extent to which the respondents agreed or disagreed with the outsourcing of some staff
4.3.7Findings on the extent to which the respondents agreed or disagreed with the keeping of variable costs below 30% of income.
4.3.8Findings on the extent to which the respondents agreed with the giving of allowances to staff.
4.4Findings on profitability
4.4.1Findings on the extent to which the respondents agreed or disagreed with the use of sales maximization approach to profits.
4.4.2Findings on the extent to which who agreed or disagreed with profit maximization as major objective of the school.
4.4.3Findings on the extent to which the respondents agreed or disagreed with the inconsistence in the profits over the years.
4.4.4Findings on the extent to which respondents agreed or disagreed with the 25% target profit on revenue.
4.4.5Findings on the extent to which the respondents agreed or disagreed with the steady growth of profits over the years.
4.5Cost management and profitability relationship
4.5.1Findings on the extent to which the respondents agreed or disagreed with the carrying out of cost-volume profit analysis.
4.5.2Findings on the extent to which the respondents agreed or disagreed with profitability being mainly influenced by cost management.
4.5.3Findings on the extent to which respondents agreed or disagreed with minimizing costs in order to maximize profits.
4.5.4Findings on the extent to which the respondents agreed or disagreed with the preparation of annual budgets to streamline profitability.
4.5.5Findings on the extent to which the respondents agreed or disagreed with profitability being independent of cost management.
4.5.6Findings on the extent to which respondents agreed or disagreed with stability in costs causing stability in profits.
CHAPTER FIVE
5.0Summary of the findings, conclusion and recommendations
5.1Introduction
5.2.1Cost Management
5.2.2Profitability
5.2.3Relationship between management and profitability
5.3Conclusion
5.4Recommendations
5.5Areas for further research
REFERENCES
APPENDIX I
BUDGET
TIME SCHEDULE
APPENDIX II
QUESTIONNAIRES
LIST OF TABLES
Table 1: showing expected actual and the likely cash variances.
Table 2: Showing the study population……………………………...... 13
Table 4.2.1: Shows the response rate
Table 4.2.2: Showing the gender of respondents
Table 4.2.3: Shows the marital status of respondents in Motherland academy secondary. ……………………………………………………………………………………
Table 4.2.4: Showing the education levels of the respondents
Table 4.2.5: Showing number of years respondents have worked in the school.
Table 4.2.6: Showing different positions held by respondents in the school.
Table 4.3.1: Showing response on employment of staff with appropriate skills and experience
Table 4.3.2: Showing on the extent to which respondents agree or disagree with the employment of the right number of staff.
Table 4.3.3: Showing the response on buying of school items only when they are needed. ……………………………………………………………………………………
Table 4.3.4: Showing response on proportionality of salary scale to the level of income
Table 4.3.5: Showing the response on the presence of measures to counter fees defaulters in the school.
Table 4.3.4: Showing response agreed or disagreed with the outsourcing of some staff
Table 4.3.7: Showing the responses on keeping variable costs below 30% of income.
Table 4.3.8: Showing the responses on the giving of allowances to staff.
Table 4.4.1: Showing the response on the use of sales maximization approach to profits. ……………………………………………………………………………………
Table 4.4.2: showing the response on profit maximization as a major objective
Table 4.4.3: Showing the response on the inconsistence in the profits over the years.
Table 4.4.4: Shows the response on 25% target profit on revenue.
Table 4.4.5: Showing the response on steady growth of profits over the years.
Table 4.5.1: Showing response on the carrying out of cost-volume profit analysis
Table 4.5.2: Showing the response
Table 4.5.3: Shows the response
Table 4.5.4: Shows the respondents.
Table 4.5.5: Showing the respondents
Table 4.5.6: Showing the extent of respondents
LIST OF ABBRAVIATIONS
ROE-Return on Equity
OEE-Overall Equipment Efficiency
TQM-Total Quality Management
SA-Strongly Agree
A-Agree
Ns-Not Sure
D-Disagree
SD-Strongly Disagree
ABSTRACT
The study was basically carried out to establish why cost management has failed to ensure high levels of profitability of motherland academy.
The specific study objectives included establishing how costs are managed in the school, finding out the profitability levels and trend registered in the school and establishing the relationship between cost management and profitability in the school.
Cross-sectional, qualitative and qualitative research designs were used to indicate the relationship between the variables. Stratified sampling with the help of questionnaires was used upon 29 respondents who were picked from sampled cost management centers. Respondents included management, teaching staff and the non-teaching staff.
Much as there were cost management controls at MotherlandAcademy according to the findings, the controls are relaxed and no effects are felt across the profitability levels. There was a strong positive relationship between cost management and profitability as indicated by Table 4.5.5.
It was therefore recommended that motherland academy should develop policies that can streamline ways of lowering variable costs, reduce as much as possible the allowances given to staff if the reduction can not scrap them off completely, carryout a systematic cost-volume profit analysis as much as possible irrespective of the school being a service organization; maintain the standard of the school to attract more students join the school, put deadlines on when all students have to have paid school fees and use the just-in time approach to reduce redundant resources.
1
CHAPTER ONE
1.0Introduction
This chapter contains information about the background of the study, statement of the problem, purpose of the study, research objectives, research questions, scope of the study, and significances of the study.
1.1Background of the study
According to Kamukama (2006), cost refers to the amount of expenditure, actual (Incurred) or notional (Attributable), relating to a specific activity. It represents the amount of resources that are usually foregone in pursuing an objective or given up in exchange of some goods and services. Resources given up are always in monetary terms. It is an exchange price, sacrifice made to secure some benefit. Sacrifice may be represented by a decrease in assets value or increase in liabilities if it involves acquisition of goods and services on credit.
According to Lucey(2003),costs are classified depending on the principle bases which include; natural classification, cost behavior, degree of traceability to the product, degree of association with the product, relationship with the accounting period, functional classification, costs for decision making and planning, costs for control and normality classification.
According to ( cost management.g.asp). Cost management refers to the function required to making effective financial control of a project through the process of evaluating, estimating, budgeting, monitoring, analyzing, forecasting and reporting the cost information. The ability to maintain and calculate appropriate cost data relating to a product or service.
Profitability is the measure of the overall performance and effectiveness of a business organization. It’s a technical analysis term which is used to compare different investments within a system (Pandey, 2001). For Albrechit (1983), Profitability is the ability of the firm to make a gain in the business activity for the benefit of the owners of that business entity.
Despite of the presence of cost control system that aims at minimum functional costs like welfare budget, accommodation, administration and procurement. Credit risk resulting from students defaulting on school fees payments , competition and poor implementation of cost management controls have still made Motherland Academysecondary School to experience low profitability levels despite the fact that qualified staff has been employed and acquiring only the necessary school facilities and improving on the advertising modes.
Table 1: showing expected actual and the likely cash variances
All the above problems continue to exist as illustrated below.
Year / Term / Budgeted inflows / Actual outflows / Variance2009 / I
II
II / 11,325,000
10,690,850
12,759,150 / 7,111,350
8,345,000
9,150,350 / 4,213,650
2,345,850
3,608,800
2010 / I
II
III / 13,501,00
15,000,200
12,507,00 / 14,120,000
15,891,000
11,980,000 / 619,000
890,000
527,000
Source: Management Reports (Board of Director’s meeting as at the end of each year 2009 & 2010(secondary data)
The above circumstances have therefore prompted the researcher to carry out an investigation on the cost management and profitability in the school; otherwise the problem could continue to perish.
1.2Statement of the problem.
Cost management in every organization determines the level of profitability. MotherlandAcademysecondary school has since 2009 restructured its control systems through credit risk controls and employing the required staff. Despite all the above efforts to minimize operational costs, low profitability is still reported. This seems to be as a result of poor implementation of cost management controls as evidenced by the variances of 3608800and 527000 in the expected inflows and actual outflows for the years 2009 and 2010 respectively, as stipulated by the board of governors at every end of the financial year.
1.3Purpose of the study
To establish whether cost management affects the profitability levels of MotherlandAcademySecondary School.
1.4Objectives of the study
- To establish how costs are managed in MotherlandAcademySecondary School.
- To find out the profitability levels and trend registered in the school.
- To establish the relationship between cost management and profitability in the school.
1.5Research questions
- How are the costs managed in MotherlandAcademySecondary School?
- What is the profitability levels reported in the school?
- What is the relationship between cost management and profitability?
1.6Scope of the study
The scope of the study was confined to content scope, geographical scope and time scope as below
1.6.1Content Scope
Though there existed various causes of low profitability levels the researcher focused on cost management as the possible cause of low profitability levels of MotherlandAcademySecondary School.
1.6.2Geographical Scope
The study was limited toMotherlandAcademySecondary School located in KazoVillage, Wakiso district.
1.6.3Time Scope
The study took 12 weeks period as the period under review.
1.7Significances of the study.
Findings of the study will be of great importance to the following beneficiaries in the following ways.
- MotherlandAcademy will be able to improve on the management of costs as the study findings will generate new ideas pertaining to cost management.
- Business managers will benefit from the study by adopting best ways of cost management in order to improve on their profitability levels
- It will enable the researcher to use appropriate recommendations to Motherland regarding cost management.
- To the researcher, the study will be a continuation to other channels of research and a requirement to the fulfillment of bachelor’s degree in commerce of MakerereUniversity.
CHAPTER TWO
LITERATURE REVIEW
2.0Introduction
This chapter represents a review of the selected knowledge of Literature on cost management and profitability by previous scholars, authors and researchers.
2.1Cost Management
Blocher, Chen and Lin (2002), defines cost management as the use of cost accounting systems and methods to guide current and future operations towards specified objectives. The analysis and interpretation of cost data is critical to the decision making process.
Allan (1989,) argues the term cost management as widely used in business today but unfortunately, it has no uniform definition. Cost Management generally describes the approaches and activities of managers in the short and long run planning and control decisions that increase value for customers and lower costs of products and services. For example; Managers make decisions regarding the amount and kind of materials being used, changes of plant processes and changes in product designs. He continues to say that information from accounting systems help managers make such decisions but the information and accounting systems are not themselves cost management.
Lucey (1994), referred to cost management as the use of cost accounting systems and methods to guide current and future operations towards specified objectives. The analysis and interpretation of cost data is critical to decision making process.
According to ( cost-management.g.asp), cost management refers to the function required to maintain effective financial control of a project through the process of evaluating, estimating, budgeting, monitoring, analyzing, forecasting and reporting the cost information, ability to maintain and calculate appropriate cost data relating to a product or a service.
Drucker (2001), also points out the importance of considering non financial and long term measures of operating performance, if a firm is to compete successfully.
According to Blocher, Chen and Lin (2002), cost management involves the use of information which managers need to effectively manage the non profit making organizations and includes both financial information about costs and revenues as well as relevant non financial information, about productivity, quality and other key success factors for the firm. They argue that financial information alone can be misleading because it tends to have short term focus what we earned last month for instance for a competitive success, a firm needs to focus on long-term factors such as products or service quality, and customer loyalty. Financial information emphasis leads to stress cost reduction while ignoring quality standards. They continue to say that this decision could be a critical mistake to the loss of customers and market share in the long run.
2.1.1Need for cost management
Today business need cost management in order to contribute value by continuously improving the performance of their assets and making the existing ones more valuable than acquiring new plants. Business drivers focus on metrics such as Return on Equity (ROE) and Overall Equipment Efficiency (OEE) both of which are critical contributors to the over all goal of achieving operational excellence.
(htt://
2.1.2Cost Management goals and objectives
Blocher, Chen and Lin (2002), highlights on a number of goals of cost management as follows;
To let Managers see the effects of the contemporary business environment on cost management methods and practices including the global business environment, information technology, focus on customers, new management organizational forms, ethical, political and cultural considerations.
To make managers understand how a firm chooses its competitive strategy including the identification and measurement of critical success factors.
To make managers understand and apply appropriate cost management methods in each of the four management functions that is to say; strategic Management, planning and decision making, preparation of financial reports and management and operational control.
To make managers understand how cost management methods and practices are used to help the firm succeed.
To let managers understand the role of cost management in the firm’s use of contemporary management techniques like Total Quality Management (TQM), continuous improvement, mass customization among other issues.
Also according to nearly all business professional know the major components of a general ledger system or at least two of the important reports generated by it which includes the following;
Provision of financial information to help managers in their decision making and planning activities.
Accumulating costs for stock valuation hence leading to efficiency
2.1.3Limitations of cost management
According to Drury (2000), cost management has got its limitations and critics as below;
Cost Management does not eliminate the arbitrary for instance; a single purchase order may contain items used on several different products. Unfortunately, as more and more actions are aggregated into an activity, the ability of a cost driver to press accurately the resources consumed by the products decreases.