A CASE STUDY OF SULFO LTD, RWANDA THEONESTE ...

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COST INFORMATION SYSTEM AND FINANCIAL

PERFORMANCE OF MANUFACTURING COMPANIES: A CASE

STUDY OF SULFO LTD, RWANDA

THEONESTE IYAKAREMYE

MBA/0292/12

A Research Project Submitted in partial fulfillment of the requirement for

the award in Master in Business Administration (Accounting and

Finance Option) of Mount Kenya University

NOVEMBER 2014

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DECLARATION

This research study is my original work and has not been presented to any other

institution. No part of this research should be reproduced without the authors‘ consent or

that of Mount Kenya University.

Student Name: IYAKAREMYE Theoneste

Sign………………………… Date …………………………..

Declaration by the supervisor

This research has been submitted with our approval as The Mount Kenya University

Supervisor Name: Osiemo KENGERE

Sign…………………………….. Date…………………………

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DEDICATION

To my brother NIYONGIRA Alexis

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ACKNOWLEDGEMENT

This work was accomplished with the help and support of several people. A number of

individuals and institutions have made considerable and invaluable contributions to bring

this study to completion. There is no gainsay that I am indebted to all those who

encouraged and assist me, all of whom cannot be mentioned here.

I sincerelywish to express my sincere gratitude to my supervisor OsiemoKengerefor his

guidance, suggestions, recommendations, encouragements, and authorities. Without him, it would

be difficult to achieve my objectives in time. I would like also to thank all the staff of MKU

especially my lectures.

I am very grateful to the Managing Director of SULFO LTD Mr. H. Dharmarajan, for

offering to me especially to provide vital information for the study. Finally, I

acknowledge the special emotional support that was offered to me by my brother, Mr.

Niyongira Alexis and all my colleagues and friends.

I would like to thank all students of MBA (Mount Kenya University) who cooperated

with me through discussions and exchanging ideas while carrying out research.

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ABSTRACT

The study were examined the relationship between cost information system and financial

performance of manufacturing companies, with reference to SULFO LTD. The objectives

of this study are to examine the contribution of cost information system on the financial

performance of manufacturing companies, to assess the practice of cost information

system and its impact in SULFO LTD, to examine how the performance of SULFO LTD

is affected by cost information system, to assess the impact of costs control (materials,

labor and overheads) on the performance of SULFO LTD, and then suggest measures for

the improvement of cost information practice for better and increased financial

performance of SULFO LTD The related literature was reviewed to understand the

conceptual framework from various secondary data sources. Primary data was collected

using questionnaire and interview to achieve the stated objectives. Data analysis was done

using SPSS‘s frequencies and percentages; means and PLCC. Findings revealed that majority of

the respondents were female, falling in the age bracket of 20 – 39 years, with bachelor‘s degree,

and experience between 4-6 years. Means showed that both the level of cost information system

implementation and the level of financial performance of SULFO LTD were satisfactory. PLCC

revealed a positive and significant relationship between cost information system implementation

and the level of financial performance of SULFO Ltd while regression analysis showed that cost

information system contributes 90% to financial performance. Basing on the above findings, the

percentage of business profit retained for expansion purposes need to be increased, Business plans

to list on the stock exchange in future need to be handled sophisticatedly, on the time capturing

and accurately recording transactions need to be emphasized all the time, Budgets should be

prepared to forecast operations and compare estimate with actual results, and accounting policies

adopted need to be applied consistently.

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TABLE OF CONTENTS

DECLARATION................................................................................................................ ii

DEDICATION...................................................................................................................iii

ACKNOWLEDGEMENT ................................................................................................ iv

ABSTRACT ........................................................................................................................ v

TABLE OF CONTENTS ................................................................................................. vi

LIST OF TABLES ............................................................................................................ xi

LIST OF FIGURES ......................................................................................................... xii

LIST OF ABBREVIATIONS AND ACRONYMS ......................................................xiii

OPERATIONAL DEFINITION OF KEY TERMS .................................................... xiv

CHAPTER ONE: INTRODUCTION .............................................................................. 1

1.0. Introduction ................................................................................................................... 1

1.1. Background of the Study .............................................................................................. 1

1.2 Statement of the Problem ............................................................................................... 2

1.3 Objectives of the Study .................................................................................................. 3

1.3.1 General objective ........................................................................................................ 3

1.3.2 Specific objectives ...................................................................................................... 3

1.4 Research question .......................................................................................................... 4

1.5 Significance of Study ..................................................................................................... 4

1.6 Limitation of the Study .................................................................................................. 5

1.7 Scope of Study ............................................................................................................... 5

1.7.1 Content scope of study ................................................................................................ 5

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1.7.2 Geographical and time scope ...................................................................................... 5

1.8. Organization of the study .............................................................................................. 6

CHAPTER TWO: LITERATURE REVIEW ................................................................. 7

2.0 Introduction .................................................................................................................... 7

2.1 Review of theoretical literature ...................................................................................... 7

2.1.1 Cost ............................................................................................................................. 7

2.1.2 Accounting .................................................................................................................. 8

2.1.3 Cost accounting ........................................................................................................... 8

2.1.4 Manufacturing ............................................................................................................. 8

2.2 Conditions for Effective Costing System ...................................................................... 9

2. 3 Classification of Costs ................................................................................................ 10

2. 4 Elements of Cost ......................................................................................................... 10

2. 5 Financial Performance ................................................................................................ 12

2.6 Relationship between cost information and organizational performance .................. 13

2.7 Profitability .................................................................................................................. 13

2. 8 The cost information ................................................................................................... 14

2. 9 Systems used in cost control ....................................................................................... 14

2. 9.1 Cost estimates systems ............................................................................................. 14

2. 9.2 Cost statement presentation ..................................................................................... 15

2.10. Costing principles and techniques ............................................................................ 16

2.11 Marginal costing ........................................................................................................ 16

2.12 Absorption costing ..................................................................................................... 16

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2.13 How to manage production cost ................................................................................ 17

2.13.1. Responsibilities in Production Management ......................................................... 17

2.13.2 Production Management in Action ......................................................................... 18

2.13.3 How to manage production in an ever changing environment ............................... 18

2. 14 critical review............................................................................................................ 18

2. 15 Research Gap ............................................................................................................ 19

2. 16 Conceptual frame work ............................................................................................. 19

2.17 Summary of the Knowledge Derived from the Study of Literature .......................... 21

CHAPTER THREE: RESEARCH METHODOLOGY .............................................. 23

3.0. Introduction ................................................................................................................. 23

3.1. Research design .......................................................................................................... 23

3.1.1Primary data ............................................................................................................... 23

3.1.2. Secondary data ......................................................................................................... 24

3.2. Study populations........................................................................................................ 24

3.3. Sampling ..................................................................................................................... 24

3.3.1 Sample size ............................................................................................................... 25

3.3.2 Sample Size and sampling procedures ...................................................................... 25

3.4. Data Collection and Methods...................................................................................... 27

3.4.1. Documentation ......................................................................................................... 27

3.4.2. Interview .................................................................................................................. 28

3.4.3. Questionnaire technique........................................................................................... 28

3.5. Data Processing and Analysis ..................................................................................... 29

3.5.1. Editing ...................................................................................................................... 29

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3.5.2. Coding ...................................................................................................................... 29

3. 5.3. Tabulation ............................................................................................................... 29

3. 5.4 Validity .................................................................................................................... 30

3.5.5 Reliability .................................................................................................................. 30

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND

INTERPRETATION ....................................................................................................... 31

4. 0 Introduction ................................................................................................................. 31

4.1 Characteristics of the respondents ............................................................................... 31

4.1.1 Age ............................................................................................................................ 31

4.1.2 Respondents‘ experience .......................................................................................... 32

4. 1.3 Education level......................................................................................................... 33

4. 1.4 Position held in the institution ................................................................................. 34

4. 2. Introduction ................................................................................................................ 34

4.2.1 The main objectives of cost information system ...................................................... 35

4.2.2 Standard costing and budgetary control in cost management ................................... 35

4. 2.3 A cost data presentation or cost statement. .............................................................. 36

4. 2.4 The resources used to fix the selling price of a product. ......................................... 36

4.2.5 The possible reasons of the failures of SULFO ........................................................ 36

4. 2.6 The possible reasons for stopping production in SULFO ........................................ 38

4.2.7 The measures of performance in SULFO ................................................................. 39

4.2.8 Financial Performance .............................................................................................. 40

4.2.9 Illustrates financial performance using a histogram. ................................................ 41

4.2.9 Cost information system is a tool for profitability. ................................................... 42

4.3. Analysis of data collected from working papers produced by SULFO ...................... 42

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4.3.1 Cost statement of SULFO ......................................................................................... 42

CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATION .... 46

5. 0 Introduction ................................................................................................................. 46

5. 1 Summary ..................................................................................................................... 46

5.2 Conclusion ................................................................................................................... 47

5.2.1 Answers to research questions .................................................................................. 47

5.2.2 Achievement of research objectives ......................................................................... 50

5.2.2.1 Objective one: To analyze the practice of cost information system in SULFO LTD

in controlling and minimizing production cost. ............................................................. 50

Objective two: To assess the impact of cost control (material, labor, overheads) on the

profitability of SULFO ...................................................................................................... 51

Objective three: To examine how profitability of SULFO LTD is affected by cost

information system............................................................................................................. 52

5.3 Recommendations ........................................................................................................ 52

5.4 Suggestions for further study ....................................................................................... 53

REFFERENCES .............................................................................................................. 54

APPENDICES .................................................................................................................. 58

Authorization Letter ........................................................................................................ 59

Blank Questionnaire ........................................................................................................ 60

APPANDIX 1: QUESTIONNAIRE ............................................................................... 60

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LIST OF TABLES

Table 2.1: Cost statement presentation .............................................................................. 15

Table 3.2 : Study Sample Selection ................................................................................... 27

Table 4.3: Distribution of respondents by age ................................................................... 32

Table 4.4: Distribution of respondents by length of time in service with SULFO ............ 32

Table 4.5: Respondents level of education ........................................................................ 33

Table 4.6: distribution of respondents on the job position in the institution ..................... 34

Table 4.7: respondent‘s opinion ......................................................................................... 35

Table 4.8: The possible reasons of the failure of SULFO ................................................. 37

Table 4.9:The respondents view on why production some time can stopped in SULFO .. 38

Table 4.10: Represents the view of respondent on the measure of performance .............. 39

Table 4.11: Descriptive statistics on financial performance .............................................. 40

Table 4.12: Respondents view on cost information and performance ............................... 42

Table 4.13: Cost of SULFO ............................................................................................... 43

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LIST OF FIGURES

Figure 2.1: Conceptual frame work ................................................................................... 21

Figure 4.2: Histogram showing normal curve for level of financial performance ............ 41

Figure 4.3: Cost of SULFO ................................................................................................ 44

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LIST OF ABBREVIATIONS AND ACRONYMS

ABC : Activity-Based Costing

CIMA : Chartered Institute of Management Accountants

GAAPS : Generally Accepted Accounting Principles

MBA : Masters in Business Administration

MKU : Mount Kenya University

UK : United Kingdom

US : United States

UTEXRWA : Usine de Textile du Rwanda

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OPERATIONAL DEFINITION OF KEY TERMS

Cost ascertainment

The costs of producing different commodities or providing services must be ascertained

accurately. These costs consist of material cost, labour cost and overheads.

Disclosure of waste

The costs incurred for the production of any commodity can be determined in advance in

view of past experience. If actual costs are higher than the expected or standard costs then

this excessive cost can be analyzed.

Decision Making

The management is responsible to make decision regarding what goods should be

produced and in how much quantity. Cost accounting provides necessary information to

the management for making decisions.

Cost control

Cost control is an important function of the management. Material cost, labour and

overheads must be maintained at desirable levels. Cost accounting principles are used to

eliminate unnecessary costs

Measurement of efficiency

Cost data are used to measure the efficiency of an organization. If there are various

departments of a business enterprise then it is important to determine the relative

performance of these departments

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CHAPTER ONE:INTRODUCTION

1.0. Introduction

This chapter is an introductory chapter intended to deal with the background of the study,

the statement of the problem, the objectives of the study, the significance of the study, the

research questions, the limitations of the study, and the scope of the study entitled

1.1. Background of the Study

The best cost information system is the fruits of efficiency, effective and well managed

institution. It is in that prospective that an institution can excel and be able to implement

its strategic plans and position itself as a competitive and successful institution. Well-

conceived strategic plans; position the institution in the right way at the right time for

implementation and execution in the long run. In other words this means being positioned

on top of the ladder Hermason, 2008).

The focus is to improve the cost information system of manufacturing company through

cost accounting in developing countries and Rwanda where some businesses are less

developed, cost information systems provide information to assist managers in their

planning and control activities and making decisions.

According to Nisar (2010), some manufacturing businesses fail, others do not generate

the income, these happened because managers didn‘t make the appropriate decision. It‘s

that reason the different groups of people (shareholders, creditors, tax authorities,…) need

the results of management; they need the information concerning past, present and

expected future activities of the business.

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Storey (1995) for the manufacturing companies to provide this information need cost

department which provides cost information. It‘s important to determine and analyze total

costs incurred in the production of any commodity or providing any service. These costs

must be recorded properly and charged to the relevant jobs or activities. Costs are

presented to the management for making decisions and evaluating the performance of the

organization

According to Saleemi (2010) cost accounting was developed primarily to serve the needs

of management. Accurate facts and figures had to be provided to support any claim for

price increase. This also increases the need for accurate cost determination. The great

depression increased the need to determine cost more precisely, so that it may be ensured

that cost did not exceed the market place. These factors plus ever-increasing scale of

business made cost information as an indispensable managerial tool. Its role is to provide

and process information about the organization‘s various products, services, financial

details and other activities (determination of price, fixed cost, variable cost….)

In Rwanda, manufacturing companies have to keep cost accounting so that adequate and

comprehensive information can be reported to the management for proper planning and

decision making.

1.2 Statement of the Problem

Cost information system is a very important tool for utilization of an entity‘s resources. It

helps an organization to control and minimize its costs thereby maximizing profitability.

A day to day process of collecting, analyzing, recording, classifying and summarizing all

costs incurred in manufacturing each product is important in order to ascertain the cost

per unit of each product, to control production costs and so having a good pricing policy

which is based on cost data and information.

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Cost information system aims at providing detailed costs information for managerial

decision making. It is important that manufacturing organizations maintain a system of

cost information in order to exercise a thorough control over their production costs since

an inefficient control can lead to losses and gradually fail to generate returns to the

owners.

According to Saleemi (2010) the financial accounts do not provide detailed information

and it becomes difficult to assess which product is more profitable. This fact emphases

the need and importance of cost information.

As reported byRusanganwa (2004), manufacturing companies have been having a

problem of not managing effectively their cost information which results in the increase

of selling prices for their products.

Failure to manage production cost of a firm adequately may result in collapse of the firm.

It is for this reason that the research intended to identify the cost information system and

the performance of manufacturing companies.

1.3 Objectives of the Study

1.3.1 General objective

The general objective of this study is to examine the contribution of cost accounting in

cost efficiency and financial profitability of manufacturing companies.

1.3.2 Specific objectives

This study specifically aims at achieving the following objectives:

i. To analyze the practice of cost information system in SULFO LTD in controlling and

minimizing production costs.

ii. To examine how the profitability of SULFO LTD is affected by cost information.

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iii. To assess the impact of costs control (materials, labor and overheads) on the

profitability SULFO LTD

1.4 Research question

i. Does cost information system help in controlling and minimizing production

costs?

ii. What is the contribution of cost information on the financial profitability of

SULFO LTD?

iii. What is the impact of costs control (materials, labor, and overheads) on the

profitability of SULFO LTD?

1.5 Significance of Study

The study is anticipated to aid owners and managers of manufacturing companies in

evaluation of their business in terms of competitiveness by identifying the important role

played by the adoption of cost information system.

The findings of this study is anticipated to help decision makers as well as policy makers

in private sector or non-profit agencies that intends to promote the growth and success of

manufacturing companies and SME‘s. The study is useful in the building of strategies to

encourage greater efficiency in small business record keeping particularly in adopting

such a system. The study is anticipated to be useful to consultancy firms in this area of

study who can advise on role of technology to the investors and the government basing on

the findings of this study.

The study will also be useful to students and future researchers, as it will contribute to

literature concerning cost information system as a way of successful managing of SME‘s

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1.6 Limitation of the Study

Suspicious respondents: It was not easy to convince all the respondents. Some of them

were suspicious about the study and reluctant to give the needed information and some

can completely refuse to respond to the questionnaire distributed to them.

Subjectivity of the respondents: responses without facts and evidence can be given due to

the negligence of respondents; some of them can answer to the questionnaire without

taking into consideration their real perception. Objectivity of the study: This is common

that the respondents answer the questions in the way they want without putting any

emphasis and commitment in mind to the real question just before answering.

1.7 Scope of Study

1.7.1 Content scope of study

The research was conducted under SULFO LTD. as a case study, a manufacturing firm

found in Kigali City. This company has been chosen simply because it was created a long

time ago and has been expanding justifying the level of its profitability.

The emphasis of this study was put on questioning the companies‘ management and

accountants to know their evaluation of the cost information on the financial performance

of manufacturing companies. (2009-2012)

1.7.2 Geographical and time scope

This study was carried out in Rwanda specifically in SULFO LTD

This study covered the period between 2009 up 2012(3years) because this company has a

good variances of profitability.

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1.8. Organization of the study

The study is presented into five chapters as follows;

The first chapter contains the introduction of the study giving the back ground of the

study, statement of the problem, research questions, and objectives of the study and

organization of the study.

The second chapter is the review of related literature. These are views and contributions by

different authors about the financial statements information, their importance and their

contribution in business performance

The third chapter contains the methodology that was used in carrying out research.

The fourth chapter containsresearch findings and discussion in a summarized and

understandable manner.

The fifth chapter contains the summary, conclusions and recommendations of the study.

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CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.0Introduction

This chapter reviews the literature that was brought forward by different authors. It

attempt to define and explain the issues related to the topic of research to arrive at a

conceptual framework. In this regard, this chapter focused on the definition of key words

used in the topic, need for cost account, cost information, financial accounting and cost

accounting, use of cost data or information , performance indicators and how to manage

production and responsibilities in production management.

2.1 Review of theoretical literature

2.1.1 Cost

Saleemi (2000), ―a cost is the value of economic resources used as a result of production

of any commodity or performing any service. For example, if shillings 5000 are spent to

produce 100 units of cloth then this amount is referred as cost. Costs should be related as

closely as possible to their causes and costs are always expressed in financial terms‖.

Nigan (2009), the term cost can be defined as ―expenditure incurred in doing something.

It represents a sacrifice, a foregoing or a release of something of value.‖

Cost is frequently required in the business for the purpose of assisting to the determine or

revise prices to measure the efficiency of a department or operations and assist

management in deciding between alternatives, such as make or buy problem etc.

A cost can be defined as a sacrifice made usually measured by the resources given up to

achieve a particular purpose.

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2.1.2 Accounting

Accounting has been defined by Chartered Institute of Management Accountants U.K.

(C.I.M.A., 2001) in the words ―the analysis, classification and recording of financial

transactions and the ascertainment of how such transactions affect the performance and

financial position of a business.‖

Accounting is the process by which, financial information about a business is recorded,

classified, summarized and interpreted and then, communicated to owners, managers and

other interested parties.‖

2.1.3 Cost accounting

Storey (1995).Cost accounting is the specialized branch of accounting which assist

management to control costs, and create or intensify an awareness of the importance of

cost to the well being of the company or in other words to stimulate cost consciousness.

Cost accounting establishes budgets and standard costs and actual costs of operations,

processes, departments or products and the analysis of variances, profitability or social

use of funds. Managers use cost accounting to support decision-making to cut a

company‘s costs and improve its profitability

2.1.4 Manufacturing

Schmid (2005).manufacturing is the use of machines, tools and labour to produce goods

for use or sale. The term may refer to a range of human activity, from handicraft to high

tech, but is most commonly applied to industrial production, in which raw materials are

transformed into finished goods on a large scale. Manufacturing companies are those that

convert raw materials into finished goods for the purpose of selling them.

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2.2 Conditions for Effective Costing System

Kettner (2003), the purpose of cost accounting can be achieved only when an effective

costing system is established. A costing system is designed according to the requirements

of an enterprise. The costing system should be simple, economical and practicable

continues by suggesting the following main conditions for an effective and successful

costing system:

There must be a proper system of stores and stock control.

There must be co-operation and co-ordination among the staff members of the

organization.

The wages procedure must be proper and satisfactory. The labour costs should be charged

to respective jobs, products or departments accurately.

Some standardized printed forms must be used for recording the receipts of materials,

recording the labour hours worked and wages calculations and other activities of the

organization.

The overheads must be recorded accurately and these must be charged to the respective

production departments. These overheads must be also absorbed to the units produced.

The costing department must be established. The responsibilities and duties of cost

accountant should be clearly defined.

The cost accounts and financial accounts should be maintained in such a way that their

results can be reconciled easily. The information available from both sets of accounts

should be correct and adequate.

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2. 3 Classification of Costs

Weetman (1996) says that the achievement of the objectives of cost accounting requires

that cost should be ascertained, classified and grouped. Cost classification may be defined

as the process of grouping costs according to their common characteristics. There are

many objectives of cost classification depending on the requirements of management.

2. 4 Elements of Cost

Jain (2002), the main elements of cost are raw material, labour and overheads. These are

explained as follows:

1. Raw material

Raw material is a main element of cost. Material cost has a greater share of the total

production cost. Raw materials are converted into finished goods by manufacturing

enterprises. For example, cloth is produced from raw cotton, sugar is produced from

sugar-cane, and shoes are produced from leather and so on. The amounts spent on the

purchase of raw materials are referred as raw material cost. Raw material purchase and

control system must be adequate.

Raw materials in SULFO LTD have a greater share of the total production.

The main raw materials SULFO LTD used are: camphor powder, citric acid, method

crystals, sodium bicarbonate, soubiliser, stearic acid, vitamine E, zink oxide, avocado

butter, cocoa butter.

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2.Labour

Labour is another important element of cost. The payments made to factory workers for

their services are called as labour cost. A labour cost consists of:

i. Basic pay i.e. daily, weekly or monthly wages

ii. Labour related costs e.g. holiday pay, overtime premium, etc.

Labour must also be analyzed against the various jobs completed by laborers. It must be

ensured that the laborers have really worked for the hours paid to them. It means the

laborers should not sit idle during the working hours and they should contribute

effectively to increase the production.

3. Overheads

Overheads may be defined as costs which do not result solely from a particular activity.

In other words, all those costs which are incurred by the organization as a whole and not

for some specific activities are called as overheads. These are the expenses of a business

enterprise which are incurred to run the business smoothly. These include rent of the

premises, power and electricity, telephone charges, insurance, depreciation, salaries of

office staff and so on

2.5 Measurement of Organization Performance

Nagle (2002) ―Performance‖ is a difficult concept to define and to measure. This concept

is used in management control by implementing easy to sense in English where it means

first ―result‖. It assesses the results achieved for the desired results when compared to

results ―standards‖.

Thus, organization would be declared successful if it achieves good results.

Mbangala (2004) for a private company, it can for example the realization of maximum

profit that can further enrich the shareholders: we focus so much on financial profitability.

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We cannot rely solely on the financial profitability to assess the performance of

companies.

For this author to measure company performance, we must refer to the assigned missions.

He identifies three main tasks namely the economic and industrial development, the

public interest and financial profitability.

In each mission, the author combines a performance criterion.

For example, the criterion of technical efficiency is associated with the mission of

economic and social performance is associated with the mission of general interest.

He defines performance management from three general purposes: performance results,

performance shared and performance success.

The performance results are measured by comparing the result to the target .this

corresponds to generally accepted definition of efficiency.

2. 5 Financial Performance

Simons (2000) financial ratios are useful indicators of a firm‘s performance and financial

situation. Most rations can be calculated from information provided by the financial

statements. In some cases, ratio analysis can predict future bankruptcy.

There are many standard ratios that can be used to evaluate the overall financial condition

of a company. Financial ratios can be used by the managers of a firm or shareholders

(both current and potential) or anyone else to evaluate the financial strengths and

weaknesses of the organization

Financial rations can be classified according to the information they provide. The

following are the types of rations frequently used: profitability ratios.

Profitability ratios are used to measure the firm‘s use of its assets and control of its

expenses to generate an acceptable rate of return

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2.6 Relationship between cost information and organizational performance

Anderson (1999), Performance evaluation and analysis allows interpretative and

diagnostic activities to evaluate and analyze past performance. It requires assignment of

costs and revenues to units and to managers with responsibility for them. A causal

assignment method enables them to understand how and why the costs are incurred and to

make improvements.

Such organizational learning contains both an historical perspective of costing (what

happened and why) and a future one (what happens next and with what effect).

Therefore, the method clearly calls for an appreciation of the underlying business

operational models and the internal and external circumstances that affect them.

Insight and learning from historical data is also important for segmented profit analysis.

Effective performance measurement analysis and learning usually require that cost

information be linked to the underling resources and operations being evaluated.

Arbitrary or generalized allocations of costs unrelated to a manager or work unit‘s

resources and operations obscure reality and may hinder learning and improvement.

When costing is used to influence performance it is important that not only be technically

correct but also carefully considers the motivational impact on the people being

measured.

2.7 Profitability

Watson (2001), Profitability is the primary goal of all business ventures. Without

profitability the business will not survive in the long run. Profitability is measured by

income and expenses. Income is money generated from the activities of the business. For

example, if finished goods are produced and sold, income is generated. Expenses are the

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cost of resources used up or consumed by the activities of the business. For example,

material cost is an expense of a manufacturing business because it is used up in the

production process.

Whether you are recording profitability for the past period or projecting profitability for

the coming period, measuring profitability is the most important measure of the success

of the business. A business that is not profitable cannot survive. Conversely, a business

that is highly profitable has the ability to reward its owners with a large return on their

investment. Increasing profitability is one of the most important tasks of the business

managers. Managers constantly look for ways to change the business to improve

profitability.

2. 8 The cost information

Brown (2001) said that the objective of every business concern is to obtain the largest

output from given input. The business concern has to know the cost per unit which can be

matched against the value of output or sale price. Similarly, an institution rending some

services is interested in knowing the cost of rendering the service to match it against the

value of it being paid by the consumer.

2. 9 Systems used in cost control

2. 9.1 Cost estimates systems

Mishan (2001) defined cost estimate as a calculation made in advance of manufacture of

the probable cost of an article which shows in detail the amount of each element of cost

that will enter into its production. Numerous conditions make necessary the use of cost

estimates in manufacturing. Among them are:

i. The product may have its selling price determined in advance of its manufacture

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ii. The work may be done to order in compliance with customers‘ specifications.

The effective use of cost estimates requires understanding of:

iii. The construction of cost estimates

iv. Methods of providing their accuracy and

v. The use of accounts in estimating costs systems in connection with the proof of

costs estimates and their revision.

2. 9.2 Cost statement presentation

Storey (1995) defined cost statement as the presentation of cost data in the form of

statement. This statement shows costs incurred under appropriate headings. In the case of

a manufacturing concern, the cost statement shows the prime cost, factory cost and total

cost of sales.

The format of a cost statement is presented below:

Table 2.1: Cost statement presentation

Material cost.....................................x

Labour cost......................................x

Direct expenses (if any)...................x.

Prime cost : xxx

Production overheads:

Factory rent x

Power x

Supervision x

Depreciation x xxx

Cost of goods manufactured: xxxx

Administration overhead: x

Selling and distribution overhead x

Total cost of sales :xxxxx

Add: profit .................................x

Sales xxxxxx

16

2.10. Costing principles and techniques

The purpose for which it is required and the form in which it is required by the

management determine the costing principles and techniques applied.

The following are different main techniques used in cost accounting:

Absorption costing

Activity based costing

Budget control

Marginal costing

Standard costing

Among the above the most used are two:

Marginal costing techniques and

Absorption costing techniques

2.11 Marginal costing

In this method, variables cost are charged to cost unit and fixed costs for the period are

written off in full, without attempting to charge them to individual cost units.

2.12 Absorption costing

This is technique, which charges fixed costs to products or cost units the fixed overheads

are either allocated or apportioned to cost center cost to the costs units passing through

them.

Although the process is arbitrary the result is that the cost units are charged with what is

deemed to be fair share of fixed overheads.

17

2.13 How to manage production cost

Battisti (2006), in order to manage the costs of production the following information must

be considered:

i. Some detailed cost accounts are maintained in additional to financial accounts.

ii. The control of material, labor and overheads cost is maintained accurately.

iii. Costs are classified according to functions (manufacturing, administration, selling

and distribution), or element (material, labor, and expenses) and variability (fixed,

variable, semi-variable).

iv. Standards are set up and the actual costs are compared with standard costs to

develop variances for analysis. This will indicate operating efficiency or inefficiency so

that right remedial action may be taken at the right time.

2.13.1. Responsibilities in Production Management

Maskell (2003), Production management responsibilities include the traditional "five

M's": men and women, machines, methods, materials, and money.

i. Maintain a workforce that can readily adapt to new equipment and schedules.

ii. Use industrial engineering methods to design efficient work methods.

iii. Manage both physical (raw) materials and information materials (paperwork or

electronic documentation).

iv. Obtain effective Inventory control. This involves tracking all component parts, work

in process, finished goods, packaging materials, and general supplies.

v. Exchange information between sales, financial, engineering, and planning

departments, so that production can be managed effectively.

vi. Control cost levels, and fulfil quality objectives.

18

2.13.2 Production Management in Action

Gerdin (2005), said that since the vast majority of manufacturing personnel work in the

physical production of goods, ―people management‖ is one of production management‘s

most important responsibilities.

The production manager must also choose the machines and methods of the company.

The flexibility of the production process and the ability of workers to adapt to equipment

and schedules are important issues in production management. Production management‘s

responsibility for materials includes managing the flow through processes—both physical

(i.e. raw materials) and information (i.e. data).

2.13.3 How to manage production in an ever changing environment

Robert (2005) Production management is not about "optimisation of resources", it is

about the "optimisation of the resource" As production managers chase efficiencies to

lower costs, and they feel pressure to do the opposite action. For example, a production

manager increases the batch size to spread the setup costs over a larger number of parts,

but then customer‘s phone looking for orders and now he must break the run to do an

urgent job. Thus the win is lost.

The production management solution is to minimise waste. The biggest contributor to

waste is excess inventory. So, the solution is normally, just making what the customers

need.

2. 14 critical review

As reported byRusanganwa (2004), the manufacturing company of BRARIRWA LTD

has been having a problem of not managing effectively its cost information which results

in the increase of selling prices for its products for maintaining good profit. This research

19

is going to analyze critically on how manufacturing companies can manage cost

information for better performance instead of raising price (for example through cost

analysis company can take a decision to drop product which has negative contribution or

produce a small quantity of A product and increase the quantity of B depending on the

information from cost analysis of each product)

UTEXRWA LTD for the last five years (2005-2009), Mbongori (2009) found that, the

company has been making an average annual net profit of 600 Million Rwandan Francs.

Besides, that he did an analysis on pricing found that cost analysis some time is not

respected because when a product is attractive to the market price tend to increase and

when a product is not perceived well by customers the price tend to decrease for better

performance.

If UTEXRWA LTD has been applied cost analysis profit has to be 620 million Rwandan

Francs because some product they are contributing negatively.

2. 15 Research Gap

Most of the researchers they have been analyzed performance through only profitability

which is not good at all and they forgotten Capital Adequacy, Asset Quality, Liquidity.

This research is going to analyze all elements of performance.

2. 16 Conceptual frame work

Cost information system involves more business oriented work and less number

crunching. Cost information system help decide the allocation of capital spending as well

as analyze a company's business model.

20

Cost estimates systems, expense control, cost statement are major components in Cost

information system and are considered to be the independent variable or the cause

variable.

The elements under the dependent variable (financial performance of company) include:

capital adequacy, asset quality, profitability and liquidity. The moderating variables that

affect the relationship between Cost Information System and financial performance of

company include: Policy frame work, levels of decision making

21

Figure 2.1: Conceptual frame work

Independent Variable Dependent Variable

Intervening Variables

Source: Researcher

2.17 Summary of the Knowledge Derived from the Study of Literature

From the literature review presented above on cost information system and performance ,

it is learnt that cost information system being a system that assist management in their

day to day running of the business, provides information that ultimately impact the

profitability of a company. That is why the manufacturing companies in Rwanda they

have to adopt cost information system (Larger, small and medium).

Cost information system

Material cost

Labour cost

Direct expenses

Factory rent

Power

Supervision

Depreciation

Administration overhead

Selling and distribution

overhead

Performance

Capital Adequacy

Asset Quality

Profitability and

Liquidity

Government policy

Company policy

22

Cost information system is the specialized branch of accounting which assist

management to control costs, and create or intensify an awareness of the importance of

cost to the well being of the company or in other words to stimulate cost consciousness.

The functions of cost information include ascertainment of costs, disclosure of wastes and

areas of inefficiency, control of costs, planning, and setting selling prices. When costs are

ascertained, the management will be in a position to fix a selling price that leaves their

company better off. The exercise of disclosing wastes, areas of inefficiency and

controlling costs saves the company from incurring unnecessary costs and therefore

having higher costs of production which will lead to the reduction in profits of the

company. The pre-determination of costs helps the management in comparing the actual

costs and budgeted costs so as to disclose reasons of differences. Unfavorable variances

can therefore be investigated and appropriate action taken.

Having seen the purposes and uses of cost information, the researcher gained knowledge

that if cost information system is appropriately implemented in a company can contribute

to the success and ability to provide more returns to its owners.

Operations in a manufacturing company are so complex that a system of cost information

system would be of a paramount role so that the management is equipped with a tool that

easily ascertains costs, exercises control over costs and helps in setting a selling price that

leaves the company with a satisfactory mark-up on its total costs.

23

CHAPTER THREE:RESEARCH METHODOLOGY

3.0. Introduction

This chapter gives a detailed presentation of the tools and techniques that was used to

investigate the research issues in the field. It includes spelling out the area of the study

and the study population. It further describes the methods that were used in choosing the

sample size and selection of instruments like questionnaire, interview and documentation.

It also includes data processing, analysis and problems that were encountered in this

research.

3.1. Research design

Kothari (2001), the research design is the plan and structure of investigation so conceived

as to obtain answers to research questions. This plan is the overall scheme or program of

the research. In this study, research design is descriptive in nature and the method that

used is survey method as this study aims at attempting the contribution of cost

information system and performance of manufacturing companies

This study used both primary data and secondary data to realize the stated objectives.

Data was define as facts or things certainly known and from which the conclusion may be

drawn Carl (1991).

3.1.1Primary data

Primary data is considered as first hand data the researcher gathers himself as a result of

his investigation. The primary data was collected from the population under the study

using interview schedule and the questionnaire.

24

3.1.2. Secondary data

Secondary data are those data collected from document, Kakooza,( 1996).The researcher

used available secondary data from textbooks, and journals research reports about the

activities of SULFO ltd in management report. In this study, the researcher generated

secondary data from 2009 report and 2012.This involves analysis and comparison of data

that already exists. The cost information was evaluated and quantified based on the

information provided by SULFO report. Other sources of secondary data include text

books, reports, brochures, journals, the internet and other various documents relevant to

the topic.

3.2. Study populations

The population has been defined by Grinnell (1990) as then totality of persons or objects

with which a study is concerned. Under this study the total populations available in each

department werenottaken as sample.

The department was selected depending on the interest of study and also where we can

find the information related to cost information and the performance. This study used 29

employees of SULFO ltd as sample.

3.3. Sampling

Williams, (1977) Sampling as the process of selecting people or objects to take part in a

research study. In this case all people or objects were selected to take part in a research

study.

25

3.3.1 Sample size

Grawitz (1989) determining sample size is related to the researcher‘s objectives,

monetary and personal resources and the amount of time available in which to conduct

the research. The accuracy of my survey is much more dependent upon the size of the

sample than on the population.

3.3.2 Sample Size and sampling procedures

In most surveys, it is neither feasible nor necessary to make observation on entire

population being studied though it would be the right set under consideration, but because

of the research constraints including limited resources, the observations are usually

restricted to a sample of individuals Grawitz (1989)

A sample is a sub set of population used to fulfill the objectives of the research. Under

normal circumstances; a sample selected should represent the main interest of the study

and should be selected in a way that it is possible to characteristics of the study

population. As far as this study was concerned both random sampling and stratified

sampling techniques was employed.

Survey procedure

In principle, research should cover the entire elements of SULFO ltd manufacturing

company ltd, but due to time and financial resources, researcher was select a random

sample among current elements of SULFO ltd. ―A sample is to choose a limited

number of individuals (element of the population) whose observation allows us to draw

conclusion for the entire population within which the random choice is made ‗‘According

Alain Bouchard he said that

A total population less than 1,000,000 individuals, we use the following formula to obtain

the sample size.

26

𝑛 =𝑛0

1 +𝑛0

𝑁

Where n is the sample size

N is the size of the reference population or universe survey

𝑛0is the sample size for a universe of infinite size

𝒏𝟎 =𝒁𝟐𝜶

𝟐𝒑𝟎𝒒𝒐

𝒅𝟐

Withp0: the probability of success

q0: The probability of failure

d: The marginal of error

𝛼 = Significance level

If we give a marginal of error 10% with a significance level (threshold practice) 0.05

And hence the degrees of confidence interval is 95%.We have 𝑍𝛼

2= 1.96 with probability

𝑝0 = 0.5 and 𝑞0=0.5

Thus 𝑛0 =(1.96)2 .0.5.0.5

(10

100)2

=96.04

Our target population was 40

We have:

𝑛 =96.04

1+96.04

40

=29,

As the sample size is 29

27

Table 3.2 : Study Sample Selection

Description The total

individuals in each

department

Sample size Basis for sampling

General

directorate

1 1 Suiting the objectives of

research

Finance 16 16 Suiting the objectives of

research

Budget and

control

10 5 Relevance of collective

data

Production 13 7 Relevance of collective

data

Total 40 29

Source: Researcher

3.4. Data Collection and Methods

After determining the sample size, the data collection process follows. The methods or

techniques used for this regard include documentation, interview schedule and

questionnaire

3.4.1. Documentation

Bailey, (1987) who asserted that: ―one of the basic advantages of document studies is that

they allow researcher on subjects to which the researcher does not have physical access

and thus cannot study by any other method‖ This is a data collection method is based

reading books and other documents that is relevant to the subject of the study. The

researcher was collected information from statistical year books research papers, journals

and other electronic resources. This method was having advantageous in the sense that

gives the researcher a required background and guidelines to the study

28

3.4.2. Interview

Bailey (1987) an interview schedule is a conversation, in which the researcher tries to get

information from the interviewee. The assumption of this method is that the respondents

to be interviewed have the information required. They can understand the question put to

them and can be willing to give honest answers while they face to face with the

researcher. An interview can be structured (prestructured questions are asked orderly) or

unstructured (questions constitute a frame of reference of key points around which

investigating discussion is built). In this study, the structured interview was used.

The researcher was used direct interview to collect primary data from a sample of 29

respondents by using structured interview schedule. In this research the interview was

conducted face to face between the researcher and respondents staff of SULFO ltd. This

enabled us to make enquiries on the information about cost information and performance

in SULFO l td.

3.4.3. Questionnaire technique

Bailey(1987) observation is the primary technique for collecting data on non-verbal

behavior. As a technique of data collection, a set question will be administered to the

respondents.

The questionnaire was containing both structure and unstructured questions. In the

structured questions, responses were permitted to the subjects are completely

predetermined, while in the unstructured questions, and respondents will ask to give their

ideas. That is why the questionnaire was used did not require the respondents to give their

names and other personnel identifications. The questionnaire was administrated to top

management of SULFO Ltd, the head of department and the staff of SULFO Ltd.

29

3.5. Data Processing and Analysis

Data collected from respondents is raw form, which is not easy to analyze and interpret to

make conclusions. So there is a need to process it before proper analysis can be made.

Carl (1991), data analysis refers to the transformation of respondents view into a

meaningful text. This was helped the researcher to note that data collected was analyzed

on qualitative and quantitative basis. This method helps the researcher to make a deep

analysis and understanding theoretical consideration of cost information and performance

in SULFO Ltd.

3.5.1. Editing

Carl (1991) editing is the process whereby errors in completed interview schedules and

the questionnaires are identified and are eliminated wherever possible. Editing is one in

order to guarantee accuracy, consistency, completeness and uniformity of collected data

for better coding.

3.5.2. Coding

The purpose of coding in survey is to classify the answers to questions into meaningful

categories so as to bring out their essential patterns. Was coded according to the

categories of respondents and their corresponding responses for identification purpose.

3. 5.3. Tabulation

Grinnell (1990), define tabulation as putting the data into some kind of statistical tables

such as percentage and frequency occurrence of responses to particular questions.

The editing and coding data was transferred into tables for determination of the

frequencies being made is mainly on variables considered under study.

30

Various types of questions were asked and responses given upon the topic the under study

and tables were used to indicate the responses, frequencies and related percentage, for

researcher‘s easy presentation and analysis of findings.

3. 5.4Validity

Grinnell (1990), the validity of the qualitative research design is the degree of congruence

between the explanations or interpretations of the phenomenon and the reality of the

world and the mutual meanings between the researcher and the participants. Validity

addresses the question whether the researcher captures what she/he thinks is valid.To be

secure whether the data collected contains information that the researcher thinks they

contain, ‗participant review‘ is one strategy among which the researcher was used to

enhance validity of data collected both from primary and secondary sources.

3.5.5Reliability

Grinnell (1990), reliability refers to consistency of measurement, or the extent to which

the scores are similar over different forms of the same instrument or occasions of data

collection. Another way to conceptualize reliability is to determine the extent to which

measures are free from error. More editing, compliance of interview guides to the

research problem and constant consultation with the supervisor of this study constitute,

among others, strategies to enhance reliability. From this study the researcher was tried to

find out whether the given answers provides the same results on two or more occasions,

and this was proved true the responses collected, therefore when a series of measures give

similar results, it is possible to conclude that it has high reliability.

31

CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSION

4. 0 Introduction

This chapter presents results of the study and gives the description of the background of

respondents, the dependent variable (DV) and verification of research questions. The

findings are presented, analyzed and interpreted as per the set research question in this

study.

SECTION A: Respondents Personal Details

4.1 Characteristics of the respondents

This section describes the background of respondents, according to age group, level of

education and number of years in business.

4.1.1 Age

Age is an important demographic characteristic. It is associated with the personal

qualities such as wisdom, decision-making and leadership. This characteristic was

considered from respondents as it could affect the quality of the information provided to

the researcher

32

Table 4.3: Distribution of respondents by age

Frequency Percent

20-30 years 8 27.6

31-40 years 9 31.0

41 and above 12 41.4

Total 29 100.0

Source: Primary data

Table 4.3 shows that the big number of respondents fall in the age group between 20-30

which represents 27.6%, age group 31-40 holds 31% and age group 41and above holds

41.4%. These two age groups represents in total 72.4% which indicates maturity of

respondents. The age group 20-30 holds 27.6%.

4.1.2 Respondents’ experience

Table 4.4: Distribution of respondents by length of time in service with SULFO

Frequency Percent

less than 3 years 9 31.0

4 to 7 years 12 41.4

8 years and above 8 27.6

Total 29 100.0

Source: Primary data

From the Table 4.4, it is noticed that majority of 41,4% range from 4-7 years of

experience working in SULFO and 27,6% range from 8 years and above and 31% range

from less than 3 years . This indicates that majority of respondents have more knowledge

about the organization practices, specifically cost information and its role on the

company‘s financial performance.

33

4. 1.3 Education level

The education level was considered important to the researcher because different levels of

education differ in their quality of information provided. Five options were proposed and

the table below gives a summary of the education levels of respondents.

Table 4.5: Respondents level of education

Frequency Percent

Secondary level 10 34.5

Bachelor‘s

degree 15 51.7

Master‘s degree 4 13.8

Total 29 100.0

Source: Primary data

Table 4.5 reveals that 51, 7% of the respondents have bachelor‘s degree, and 13.8% have

master‘s degree. This shows that SULFO has employed highly educated individuals.

According to the interview made with them, respondents revealed that they are graduates

in finance, accounting and economics. This means that respondents had enough

knowledge about the cost information on the financial performance in manufacturing

companies.

34

4. 1.4 Position held in the institution

Table 4.6: distribution of respondents on the job position in the institution

Frequency Percent

Head of the department 10 34.5

Head of division 13 44.8

Head of section 4 13.8

Ordinary employee 2 6.9

Total 29 100.0

Source: Primary data

Table 4.6 shows that the big number of respondents falls in the head of division which

represents 44.8%, head of departments holds. These two groups represents in total 79.3%

which indicates that the information from respondents have potentiality in fulfilling the

objectives of the study.

SECTION B: PRIMARY DATA ANLYSIS

4. 2. Introduction

This part deals with the primary data collected as per study objectives from SULFO‘s

different respondents. For the researcher of cost information system and financial

performance of manufacturing companies with a case study SULFO, I collected primary

data using questionnaire and interview. A sample size of 29 respondents was taken from

total population of SULFO‘s employees mainly in finance, budgetary and production

departments.

35

4.2.1 The main objectives of cost information system

The table 4.7 shows the level of agreement whether the main objectives of cost

accounting is to ascertain, control cost and uses in decision making.

Table 4.7: respondent’s opinion

Frequency Percent

Strongly agree 22 75.9

Agree 7 24.1

Total 29 100.0

Source: Primary data

This table depicts that 100 %( 75.9%+21.7%) of all respondents agreed that cost

information is used to ascertain, control and in decision making. Respondents‘ views and

justifications revealed that satisfactory cost reporting and meaningful fair disclosures for

internal and external purposes supported by cost records. If the company not considers its

cost information it performs slowly.

4.2.2 Standard costing and budgetary control in cost management

Standard costing is a technique of cost accounting which compares the cost with the

actual cost to determinate the efficiency of operation so that any remedial action may be

taken immediately.

36

Research demonstrates that 100% of the respondents revealed that standard costing and

budgetary control applied. The logical conclusion is that really standard costing and

budgetary control is used in decision making and cost control as supported by the

respondents. This indicates that SULFO plans and establishes well before production

begins and provides management with goals to attain and a basis for comparison with

actual results.

4. 2.3 A cost data presentation or cost statement.

The cost statement means the presentation of cost data in a form of statement. This

statement shows costs incurred under appropriate headings. In case of a manufacturing

concern, the cost statement shows the prime cost, factory cost and the total cost of sales.

Research shows that 100% of respondents revealed that cost data presentation is used in

cost reporting. This indicates that cost data presentation helps in reporting the cost

position of SULFO activities. When a company has not a cost data presentation it cannot

be accessed to cost information.

4. 2.4 The resources used to fix the selling price of a product.

In order to set a selling price of product basic information must be considered.

Research shows that 100% of the respondents were of the view that a selling price of the

products is fixed according to the production cost plus required profit. This indicates that

the production cost helps in setting price, planning and decision making.

4.2.5 The possible reasons of the failures of SULFO

Sometimes the company can stop its activities from the different causes.

37

Table 4.8: The possible reasons of the failure of SULFO

Frequency Percent

Incompetent staff 3 10.3

Absence of cost

accounting 1 3.4

Incompetence of the

administrators 6 20.7

Absence of

management control 13 44.8

Multiplicity of the

contradictory

objectives

6 20.7

Total 29 100.0

Source: Primary data

Table 4.8 demonstrates that 44.8% of the respondents showed that the possible reasons of

the failure of SULFO is the absence of management control, 3.4% were of absence of

cost accounting,10.3% were of incompetent staff, while the remaining 20.7% were of

multiplicity of the contradictory objectives and 20.7% are incompetent administrators .

The logical conclusion is that management control and cost accounting is used in order to

continuous its activities. So in absence of one from all causes can affect the business to be

failed, the management must pay attention all causes which can be a challenges to the

business activities.

38

4. 2.6 The possible reasons for stopping production in SULFO

Table 4.9:The respondents view on why production some time can stopped in SULFO

Frequency Percent

Non respected of

delivery time 17 58.6

Poor management of

stocks of raw materials 12 41.4

Total 29 100.0

Source: Primary data

Table 4.9 demonstrates that 58.6% of the respondents showed that the possible reasons of

stopping production is non-respected of delivery time of inventory and ,41.4% were of

poor management of stocks of raw materials,. The logical conclusion is that management

control of inventory is used in order to the sustainability and continuous its activities. So

in absence of one from all causes can affect the business to be failed, the management

must pay attention all causes which can be a challenges to the business activities.

39

4.2.7 The measures of performance in SULFO

Table 4.10: Represents the view of respondent on the measure of performance

Source: Primary data

Table 4.10 reveals that majority of the respondents 44.8% were of the view ratio analysis

is the measure of performance that should be examined for assessing the cost soundness

of the company 20.7% of the respondents highlighted comparative statements

analyisis,20.7% were for Standard and budgetary analysis and again 10,3% of the

respondents pointed out trend analysis. The conclusion was taken for the majority of the

respondents who constitute 44.8% that the measure of performance examined for

assessing the cost soundness is ratio analysis means that the management is worked under

planned activities.

Frequency Percent

Trend analysis 3 10.3

Inventory analysis 1 3.4

Standard and

budgetary analysis 6 20.7

Ratio analysis 13 44.8

Comparative

statement 6 20.7

Total 29 100.0

40

4.2.8 Financial Performance

Table 4.11: Descriptive statistics on financial performance

Variable Response frequency Percent

Enough capital exists Strongly Disagree 5 17.2

Disagree 8 27.2

Not Sure 5 17.2

Agree 8 27.2

Strongly Agree 3 10.3

Quality of assets is good Strongly Disagree 3 10.3

Disagree 2 6.8

Not Sure 2 6.8

Agree 12 41.3

Strongly Agree 10 34.4

Level of profitability is high Strongly Disagree 2 6.8

Disagree 2 6.8

Not Sure 1 3.4

Agree 12 41.3

Strongly Agree 12 41.3

Level of liquidity is high

Strongly Disagree 3 10.3

Disagree 2 6.8

Not Sure 1 3.4

Agree 16 55.1

Strongly Agree 7 24.1

Source: Primary data 2014

Table 4.11 indicate that respondents in the ―Agree‖ category took the largest portion, with

8 (over 27.2%), 12 (over 41.3%), 22 (35%), 16 (over 55.1%) and 12 (over 41.3%), in

respect to adequate capital, quality of assets, level profitability and level liquidity,

respectively. While, on the other hand the, ―not sure‖ category took the least portion with

5 (17.2%), 2 (6.8 %,), 1 (3.4%), and 1(3.4%) in respect to adequate capital, quality of

41

assets, level of profitability and level of liquidity, respectively. This suggests that

financial performance was on average good.

For purposes of getting an overall control analysis of how respondents rated financial

performance, items in Table 4.12 for the dependent variable (financial performance) were

aggregated into one average index.

4.2.9 Illustrates financial performance using a histogram.

Figure 4.2: Histogram showing normal curve for level of financial performance

Source: Primary data

Fig 4.2 shows that respondents‘ rating on level of financial performance mainly

concentrated on level four indicating that ―agree‖ category took the largest portion while

―not sure‖ category (five) took the least portion. Fig. 2 further indicates that generally

responses to the four set questions about the dependent variable (financial performance)

were tending towards ―agree‖ as indicated by the overall mean score of 3.24. This

6 5 4 3 2 1 0 Level of financial performance

30

25

20

15

10

5

0

Frequency

Mean = 3.24 Std. Dev. = 1.003 N = 62

42

suggests that financial performance was good in SULFO.Respondents were asked to

answer whether cost information system was a relevant tool for profitability. Results are

demonstrated in Table 4.13

4.2.9 Cost information system is a tool for profitability.

Table 4.12: Respondents view on cost information and performance

Frequency Percent

Not sure 7 24.1

Agree 16 55.2

Strongly

Agree 6 20.7

Total 29 100.0

Source: Primary data

Results from Table 4.12 indicate that over 79.4% were of the view that cost information

system was a relevant tool for profitability. However, few respondents accounting for less

than 24.1% were not sure whether management accounting was a relevant tool for

profitability

4.3. Analysis of data collected from working papers produced by SULFO

The information collected from the respondents is not enough to verify the hypotheses,

the data collected from the documents also needed to be analyzed. The table 16

demonstrates the figure of costs used by SULFO

4.3.1 Cost statement of SULFO

This statement shows all costs spent by SULFO in different activities.

43

Table 4.13: Cost of SULFO

2009 ('000

RWF) 2010 ('000 RWF) 2011 ('000RWF) 2012(000rwf)

Raw materials 6,987,184.5 7,682,385.75 7,778,758.75 8,777,456

Labour 3,394,873.8 3,672,954.3 4,711,503.5 4,999,234

Direct Expenses 2,197,436.9 2,336,477.15 3,355,751.75 3,567,651

PRIME COST 10,579,495.2 11,691,817.2 11,846,014

production overhead 15,369,242.8 17,037,725.8 17,269,021 18,564,565

PRODUCTION COST 24,948,738 27,729,543 28,115,035 29,768,761

Administration

overhead 6,512,655 65,335,790 7,449,142 7,665,698

Selling and distribution

overhead 11,200,101 9,947,521 11,239,784

Other expenses 64,033 694,336 316,020 45,303

TOTAL COST 42,724,527 45,706,190 48,118,981 48,634,537

Source: SULFO report

44

Figure 4.3: Cost of SULFO

The table 4.13 above here indicates that the cost of raw materials incurred in production

2011 increased may be resulted from the increase of price of raw materials or the need of

the company to increase its production. If the increase of the cost of raw materials is due

to the change of price, the profit of the company will reduce. But, if the increase of cost

of raw materials is due to the need of the company to increase its production, this increase

cannot affect the profit of a company.

The total direct costs (Prime cost) presented in the table 4.16 shows that there has been

increase. From 2010 to 2011 and 2012 those costs increased may be caused by the

increase of cost of raw material or cost of labors used in transformation of the raw

materials into finished product. When the increase of this cost is resulted from the

increase in payment of workers, the increase affects the profit of a company. But, this

change will not affect the profit of a company if it is due to the increase of raw materials

in the purpose of increasing the production.

0.00

20,000,000.00

40,000,000.00

60,000,000.00

80,000,000.00

100,000,000.00

120,000,000.00

2012(000rwf)

2011 ('000RWF)

2010 ('000 RWF)

2009 ('000 RWF)

45

Table 4.16 also implies that production costs 2012.That shows that the production costs

of SULFO increase each year. This increase may be resulted from the increase of direct

cost or increase of production overheads, the production overheads are indirect costs used

in converting raw material into finished output. These costs include costs such as rent,

insurance, water, power and electricity charges for the factory, depreciation of factory

plant and machinery, depreciation of factory building, maintenance and repairs of factory

plant and buildings.

When production overhead increases in a specific period, the production cost also

increases, and profit of that period reduces. When this cost increases with the increase of

output that cannot affect the profit of a company. The management of production cost

includes the management of direct material cost, direct labor cost, direct expenses and

production overhead, the management of production cost requires to pay much attention

because its increase does not mean mismanagement and vice versa, the effective

management of these costs is achieved when the costs change in the same proportion with

production. In order to maximize the profit, production cost must be reduced as much as

possible.

46

CHAPTER FIVE:SUMMARY, CONCLUSION, AND

RECOMMENDATION

5. 0 Introduction

The general objective of this study was to find out the cost information system and

performance in manufacturing companies. This chapter aims at showing the summary,

conclusion, and recommendations as well as areas for further research. As it has been

indicated in the previous four chapters, efforts were made to analyze cost information

system through appropriate methods.

5. 1 Summary

The research was carried out on ―cost information system and performance in

manufacturing companies in Rwanda‖ with SULFO ltd as case study. The general

objective of the study was to find out the contribution of cost data in manufacturing

companies. To achieve this objective more emphasis was put on the company‘s activities

to analyze whether cost information system contributes towards effective performance.

To analyze the primary data, the researcher considered the time the employees had served

in the institution and the research revealed that the majority of the respondents 67% of the

total population have worked with the institutions for more than three years. This

indicated that the respondents had much experience about the organization of the

company in general and its performance in particular.

The study also indicated that 51.7% of the total respondents hold a bachelors‘ degree,

while 13.8% of the respondents hold a master‘s degree. Hence we conclude that SULFO

has got employees who are capable of performing the work designed to them effectively

and have enough knowledge about the area under study.

47

5.2 Conclusion

5.2.1 Answers to research questions

The research whose topic was ―cost information system and performance of

manufacturing companies in Rwanda was carried out in a private institution known as

SULFO which is based in Kigali city. That company was chosen as the case study among

other private institutions because it had a good performance.

The research findings revealed that cost statement in SULFO was more performed in

accordance with its operations. The cost data presentation plays a significant role in

management of production cost as well as in other indirect costs as shown in table 4.7

where 100% of the respondents were of the view that cost data are used in decision

making. The application of cost information has increased the profit of SULFO the

research findings revealed that cost information system was neglected for long time when

the company was not familiar on the usage and this made the company to generate few

profits due to improper management of production cost as well as non-manufacturing

cost. The research findings revealed that the company‘s profitability was poor before

implementation of cost information system as it is indicated by the data analysis but

nowadays it is getting better.

Research question one: Regarding if the practice of cost information system helps in

minimizing and controlling costs

It was found out with a confirmation of 100% of respondents that cost information system

contributes much in minimizing and controlling production costs in SULFO. The research

found that cost information system provides information useful in cutting the unnecessary

expenses such as raw material wastages, labour and machine idle time expenses. The

research also noted that the pre-determination of costs in advance of the actual process of

48

manufacturing helps the company in controlling its costs by monitoring the actual

spending. It was also found that SULFO uses the trend analysis technique to follow up the

changes in the levels of costs of production to facilitate various costs related decisions.

The research, through a confirmation of respondents, revealed that cost information

system is very helpful to the company since it helps management to establish cost return

relation, hence favorable decision taken. The research noted that cost information system

enables the company to determine costs incurred and tries to uplift business financial

performance by investigating reasons for unfavorable costs variances and setting a selling

price that allows the company to yield a satisfactory profit. The research also revealed

that each manufacturing process is undertaken only when a cost-benefit analysis showed a

certain mark-up to be earned on the total manufacturing costs and that cost data are used

to prepare and implement future plans.

Research question two: how profitability of SULFO is affected by cost information

The study revealed that determination of costs is done process-wise. This was answered

by a 100% of respondents. Costs of each process of production are ascertained and then

accumulated to completed products. This is made possible by allocating direct costs to

their respective products and then allocates the indirect costs to various products with the

help of an equitable and reasonable basis of apportionment. This determination of costs

permits the company to know the profitable and unprofitable products. The study also

revealed that the SULFO‘s cost information system is designed in a way that it separates

fixed and variable costs. This helps the company in exercising control over variable costs,

budgeting the production costs, taking decisions relating to volume of output and finally

in price fixation.

49

Research question two: the impact of costs control (material, labour and overheads)

on the profitability of SULFO

The research provided the answer for the research question asking the impact of costs

control (material, labour and overheads) on the profitability of SULFO. The research,

through the support of 89.5% of respondents, revealed that when the control is effective

there will be no material wastages, labour inefficiencies and idle time expenses and

unnecessary overheads. The control of these costs saves the company from incurring high

levels of costs which reduce the level of profits. The level of profits is expected to

increase if the material, labour and overheads costs are minimized because a high mark-

up will be earned on the total costs.

The research also came up with suggestions of respondents on what could be done to

improve the practice of cost accounting for better contribution on the financial

profitability of manufacturing companies. The following are the most important

suggestions made by 80% of respondents:

i. Computerization of cost accounting system for quick and reliable data processing

and reporting

ii. Employing competent accountants

iii. Separate cost accounting system from other systems of accounting

iv. Keep the ongoing staffs training

Every research project has the pre-stated objectives to be achieved. From the data analysis

and answers to the research questions provided here above, it is seen that both general and

specific objectives to this study were achieved.

The study in general aimed at examining the contribution of cost accounting in cost

efficiency and financial profitability of manufacturing companies. The study revealed that

50

cost accounting plays a role in minimizing and controlling costs, ascertaining the costs

incurred and therefore fixing a selling price which recovers the total cost and provides a

certain profit margin.

Specifically, the present study aimed at assessing the practice of cost accounting and its

role in , examining how the profitability of SULFO is affected by cost accounting,

assessing the impact of costs control on the profitability of SULFO and lastly suggesting

measures for the improvement of cost accounting for better and increased financial

profitability of SULFO.

The study revealed that SULFO has a system of cost accounting in place operating within

the finance department. All manufacturing costs are pre-determined, and actual costs are

recorded as they are incurred by accumulating them process-wise and later allocated to

completed products. This helps in controlling and minimizing actual spending. The

profitability of SULFO is much dependent on the system of cost accounting since in

addition to controlling and minimizing costs, the cost information provided by the costing

system acts a reliable basis for fixing selling prices from which the company can earn a

certain profit margin. Some suggestions also were provided to help SULFO improve its

cost accounting system for an increased profits level.

5.2.2 Achievement of research objectives

5.2.2.1 Objective one: To analyze the practice of cost information system in SULFO

LTD in controlling and minimizing production cost.

The study revealed that 68% of the total respondents were of the view that cost

information system helps the management of SULFO in discharging its activities by

centralizing in cost reports all the information about the ongoing activities through daily,

51

monthly, termly and annual reports. Thus decisions are made basing on these periodic

reports.

Furthermore, the respondents confirmed that the employees of SULFO recognize both its

cost and financial reports. This implies the consideration of the ongoing activities, and

enhances transparency and responsibility principles which are the major needs of

management. The research found out that, SULFO uses computers to process its cost

information, this implies that the situation is conducive as computers simplify the work of

accountants. Once the work is done in a simple way, there is a probability of producing

on time, accurate and well-presented cost reports; consequently there occurs better

guidance for decision making.

In addition, the study revealed that 68% of the respondents agreed that cost information

helps in reporting the cost position of the company. That is because cost information is

able to provide all the cost data needed by the company for its progress and better

performance as it has been given the major priority by the present management.

Furthermore, the research found out that cost information is used in decision making and

planning. This means that cost information is the heart of the company where it shows the

company‘s existing problems and provides approaches and remedies to handle them.

Objective two: To assess the impact of cost control (material, labor, overheads) on

the profitability of SULFO

The research revealed that majority of the total respondents confirmed that performance

evaluation and quality assurance play a significant role in fulfilling the objectives of

SULFO. This enabled the company to control its financial operations to achieve stated

objectives and set goals. In addition, the research revealed that 50 % of the majority of the

respondents confirmed that cost information fulfils its responsibility by ensuring that

52

employees carry out activities according to established criteria and instructions. And, by

ensuring proper control and effective accountability of the company‘s resources, it means

that cost information system is appropriate to meet the set goals.

Objective three: To examine how profitability of SULFO LTD is affected by cost

information system.

The company‘s performance is known by computing and analysis of variances, 80% of

the respondents confirmed that the use of standard costing which compare budgeted and

actual costs and find out the difference between them helps the company to have the cost

image and takes corrective measures where necessary. Finally, it is noticed that for any

company‘s cost information acts as the heart while the management acts as the brain of

that company. So, once there is no brain there is no heart and thus the organ collapses.

5.3 Recommendations

In line with the findings and the main emerging issues from the study, the following

recommendations are hereby suggested:

For effective financial performance, management of SULFO LTD and other companies

should embrace effective cost analysis in the management of organizational resources.

To overcome the problem of control analysis, business organizations should employ

management methods such as internal controls and analysis which would monitor

systems and information flow in the organization; thus making it easy to control

organizational operations.

For the company to obtain higher profit, better financial and cost statement have to be

made and that is why the research results demonstrated a number of areas which require

53

much attention for the attainment of the company‘s main goals of its better performance.

Hence, the research came up with the following recommendations:

i. The company should make sure that the cost statements as well as financial statement

are sufficient to meet the goals.

ii. To attain an excellent performance the company should try to reduce operating

expenses and non-operating expenses so that these costs should not eat up profits.

iii. The company has to prepare effectively and on time detailed cost and financial plans

to create confidence in lending institutions. This will help the company to acquire

debt without any difficulty.

5.4 Suggestions for further study

Due to constraints like suspicious respondent, objectivity of the study, subjectivity of the

respondent and financial resources, the study focused on cost information system and

financial performance in manufacturing company in Rwanda. Further research is thus

recommended on the replica of this study to be conducted in other countries like Uganda,

Tanzania, Kenya, Burundi, and Congo. This will help in establishing the general trend of

the investigated variables to improve on financial performance in business organizations

in East Africa.

Research should be conducted on other variables that may affect financial performance in

business organizations in East Africa and even beyond.

54

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58

APPENDICES

59

Authorization Letter

60

Blank Questionnaire

APPANDIX 1: QUESTIONNAIRE

I am IYAKAREMYE Theoneste; and I am doing research Project as apart and partial

fulfillment for the award of a Master‘s Degree of Business Administration of Mount

Kenya University in the Republic of RWANDA. The Topic of research is Cost

information system and performance of manufacturing companies (SULFO) as the

case study.

I humbly request you to respond to the questions asked in the way you feel correct. The

questions are all about to help the researcher in his process of data collection so they

should not be considered as an examination where answers provided are considered as

right or wrong. Your responses will only be used for the purposes of this research only. It

is not necessary to indicate your name.

SECTION A: PERSONAL DATA

1. Your age group (in Years)

20-30

31-40

41-50

51-60

2. What is your length of service with the institutions?

a) Less than 3 years

b) 4 to 7 years

c) 8years and above

3. What is your education level?

a) Secondary level

61

b) Bachelor‘s degree

c) Masters degree

d) Doctorate

4. What is your job position in the institution?

a) Head of the department

b) Head of the division

c) Head of the section

d) Ordinary employee

SECTION B: INDEPENDENT VARIABLE (COST INFORMATION SYSTEM)

1. What is the role of cost information system in fulfilling the objectives of SULFO

LTD?

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………

2. a) Do you apply standard costing and budgetary control in your company?

Yes

3. How does cost information system play a role in helping the effective production cost

management of SULFO LTD?

………………………………………………………………………………………………

…

4. Do you have cost data presentation or cost statement?

Yes

No

62

5. To fix the selling price of a product, you use one of the following:

a) The production cost of this product

b) The selling price as high as possible

c) The selling price of the similar products

d) Production cost plus profit of a product.

6. We have a list of the possible reasons of the failures of SULFO LTD. would you like to

distinguish them in numbering them according to their importance?

a) Incompetent staff

b) Absence of the cost accounting

c) Incompetence of the administrators

d) Absence of management control

e) Multiplicity of the contradictory objectives.

7. What are the measures of performance should be used in order to assess the cost

soundness of the business concern as the cost statements

a) Activity ratios

b) Profitability ratios

c) Standard cost analysis

d) If others, mention them…………………………………

8. The main objectives of cost information are to ascertain, control the company‘s costs,

and decision making.

a) Strongly agree

b) Agree

c) Neutral

9. What is the role of cost information system in management of production cost

effectively and efficiently?

63

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………

10. It happened to you to stop the production for lack of the raw materials?

Yes

No

b) If yes, what are the reasons of it?

a) Non respected of Delivery time

b) Bad management of the stocks of raw materials

c) Insufficient Stock of raw materials.

1= Strongly Disagree 2= Disagree 3= Not sure 4 Agree 5= Strongly Agree

SECTION C: DEPENDENT VARIABLE (FINANCIAL PERFORMANCE)

1.1 Enough capital exists 1 2 3 4 5

1.2 Quality of assets is good 1 2 3 4 5

1.3 Level of profitability is high 1 2 3 4 5

1.4 Level of liquidity is high 1 2 3 4 5

2 Level of profitability has been improving 1 2 3 4 5

3. Do you think that cost information system is a relevant tool for profitability? If Yes,

how?

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………

64

4 .Do you think that financial performance has been improving for the last three years?

Briefly, justify your answer

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

………

5. Do you think cost information system is promoting financial performance?

-Yes

-No

-Indifferently

6. What are the financial performance tools?

INTERVIEW GUIDE

(The following questions of interview would be asked to the managers and accountants)

1. Do you think it is necessary to have a cost information system in a manufacturing

company

2. Does cost information system contribute to the financial performance in your company?

3. What do you think could be done to improve the practice of cost information in

manufacturing companies?

4. Does cost information system help in controlling and minimizing production costs?

5. What is the contribution of cost information on the financial profitability of SULFO

LTD?

6. What is the impact of costs control (materials, labor, and overheads) on the profitability

of SULFO LTD?

Thank you for your cooperation