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PROJECT TOPIC- EFFECT OF INDIRECT COSTS ON CORPORATE PROFITABILITY OF BREWERIES IN NIGERIA. A STUDY OF GUINNESS NIGERIA PLC AND NIGERIAN BREWERIES PLC

PROJECT TOPIC- EFFECT OF INDIRECT COSTS ON CORPORATE PROFITABILITY OF BREWERIES IN NIGERIA. A STUDY OF GUINNESS NIGERIA PLC AND NIGERIAN BREWERIES PLC

ABSTRACT

This study investigated the effect of indirect costs on corporate profitability of breweries in Nigeria. Specifically the study seeks to find the extent to which factory electricity generation, product promotion, general expenses and cost of advertisement affects profitability of breweries in Nigeria. In carrying out the study, ex-post facto research design involving secondary data collected from the annual statements of the two companies was used. The data collected from the secondary source were analyzed using descriptive statistics and multiple regression analytical method. Analysis of variance (ANOVA) and Durbin-Watson statistical analytical method were also used for the analysis of the variables. At the end of the study, the analysis reveals that there is a significant relationship between the profit of the companies and indirect costs. The implication of the findings is that indirect costs affect the profitability of the companies, suggesting that the companies should properly manage their costs in order to reduce the extent of expenditures on them so as to increase profit. Based on the findings of the study, it was recommended that Brewery companies whether local or multinational should consciously formulate policies geared towards effective cost control in view of its impact on profitability and secondly that financial managers should pay attention to the management of each component of indirect costs as the adverse effect on one could negate the positive effect on the other components.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A major problem facing manufacturing companies in Nigeria is the growing trend of input costs which erodes business profit and leads to constant shut down of factories (Okwo and Ugwunta 2012). This has led to a lot of brewery firms in Nigeria closing down manufacturing. For instance, the number of breweries in Nigeria in 1990 was about thirty three with total capacity of 20 million hectoliters but presently in 2012, only about four of these Breweries are still operational.

In the early 1980’s production in this all important sector grew rapidly. However, production fell marginally in 1987 and 1988 due to restriction on the import of barley malt and problems associated with the use of locally produced substitutes. During this period capacity utilization fell to about 30% (Equity Research Report, 2006). The brewery industry has contributed much to the growth and development of Nigerian economy.

Ola (2001) noted that this sector contributes about 28 percent of Manufactured Value Added (MVA) and provides direct employment for over 30,000 persons. The indirect employment associated with the industry is close to 300,000 including the firms producing ancillary services. The banning of the importation of barley by the Federal Government of Nigeria in 1987 and 1988 encouraged local farmers and agricultural research institutes in the country to massively produce substitute grains like sorghum, maize etc to satisfy the needs of the breweries industry.

This indeed enhanced the economic power of farmers, and further increased employment. The above economic benefit of the Brewery industry can only be sustained when the brewery firms make profit which ensures their remaining in business. The continuous shutting down of brewery firms because of high cost of inputs hinders the economic growth and development of the nation.

Equity Research Report (2006) opines that the main threats to the firms in the industry include rising cost of petroleum products and cost of raw materials such as barley (imported with high excise costs). The ban on the importation of barley and the replacement of barley malt with local substitutes have further increased the input cost of beer production. Packaging rates are higher, storage and transportation costs have increased drastically.

Yin Xia (2003) noted that wage rate rose relative to both capital and material prices until 1980. Thereafter, wages fell relative to capital but continued to rise relative to material prices. This sector has no doubt attracted huge foreign investments, which have enabled the companies to expand their capacity. For instance, Heineken acquired 54 per cent shareholding in Nigeria Breweries (NB) in 2000 and subsequently invested more than $500 million (about N77.5 billion) in the company to raise its installed capacity, which is now said to be about 12 hectolitres (Adedibe 2007). In 2003, NB acquired its sixth brewery at Ameke in

Enugu State, which is one of the biggest in the country. Similarly, it acquired three more breweries in 2011 from its parent company Heineken. Okwo and Ugwunta (2012) noted that commercial production of beer in Nigeria started in 1949 when the Nigerian Breweries Ltd established its first brewery plant at Igunlu in Lagos State. Nigeria Breweries Ltd continued to be the only company that produced beer until in the early 1960s when Golden Guinea in 1962, Guinness in 1963.

West African Breweries in 1964 and the North Breweries in 1970 emerged. A phenomenal growth in the number of breweries occurred in the second half of the 1970’s; this was induced partly by government’s decision to ban the importation of beer into Nigeria in 1978. Kayode, Oyejide and Soyode (2002) in Okwo and Ugwunta (2012) pointed out that in 1972 there were only four brewers producing a total of 1.65 million hectoliters per annum but a decade later there was a dramatic growth such that in 1982 there were 22 breweries firms in Nigeria with a total installed capacity of 11.5 million hectoliters per annum.

By 1990 eight years later, a total of 33 breweries plants existed in Nigeria with total installed capacity of approximately 20 million hectoliters. But while installed capacity grew up till the early 1990s, many of the brewers had ceased to be operational. Thus by 1994, only about eleven breweries remained in operation; capacity utilization had fallen substantially in many cases and several of the plants had been taken over by the industry leaders.

The performance of the companies in terms of their financials is also an indication of how lucrative the industry is, A survey of the existing reports indicate that Guinness Nigeria for instance had an operating profit1 of N26.5 billion on a turnover of N123.6 billion for its 2011 financial year, which was far better than the previous year. In its 2010 financial year, it had an operating profit of N20.7 billion on a turnover of N109 billion. Its turnover and its operating profit for 2011 financial year are N226 billion and N57 billion, respectively.

In 2010, it had an operating profit of N44.9 billion on a turnover of N185.8 billion ( Guinness annual report and accounts,2011). Between 1992-1998 most manufacturing companies experienced severe difficulties as a result of high costs of indirect expenses leading to the fall in production levels (Onuoha 2009),He also noted that since then, the industry has continued to grow slowly while many branches shut down production.

During this period, capacity utilization fell to an all-time low of 30 percent (Onuoha, 2004). Increasing success with local substitutes for barley malt has improved the capacity utilization rate to about 64 percent in 1999 for multinational breweries. Ogben(2009) observed   that indirect costs are all other costs incurred in the manufacturing process which cannot be traced directly to any of the units being produced and this includes costs of foreman’s salary, depreciation of factory plant and machinery, factory rent and rates, factory cleaning, insurance of factory plant and machinery, factory power and factory repairs.

According to Ogben (2009),these costs affect the level of corporate performance of companies. So many studies (Cynthia and Birger 1991;Owusu 2010;Adjeii 2012) have been carried out on this subject matter but most of them are in foreign countries. This is the major research gap which this study will fill. Hence given the important contributions of the brewery sector to the Nigerian economy, this research deems it necessary to evaluate the effect of indirect costs on the performance of brewery companies in Nigeria

PROJECT TOPIC- EFFECT OF INDIRECT COSTS ON CORPORATE PROFITABILITY OF BREWERIES IN NIGERIA. A STUDY OF GUINNESS NIGERIA PLC AND NIGERIAN BREWERIES PLC

1.2     STATEMENT OF THE PROBLEM

In recent years brewery industry in Nigeria has been said to suffer from inefficient and imprudent management of resources (Ogben 2009). This has resulted to shut downs and break downs of productions of the breweries at various levels. Okwo and Ugwunta (2012) and Ogben (2009) argued that most of these problems were caused by high overheads which according to them   have direct consequences on the performance of industry.

Factory electricity generation, promotion, repairable and general expenses are some of the indirect costs imparting negatively to the survival of companies in Nigeria. Moreover, the high costs of depreciation owing to weather conditions, interest paid for borrowed money, repairs of existing facilities, high tax rates in the country and insurance payments were said to have been a bane to smooth businesses in Nigeria.

In view of the above problems of overheads costs in the business activities of companies in Nigeria especially the brewery industry, research of this nature becomes highly important. Some of these problems have been highlighted by other researchers (Cynthia and Birger 1991;Owusu 2010;Adjeii 2012) in other developed and developing countries but no such known research has been carried out in Nigeria. It is based on these premises that this study will seek to investigate the effect of indirect costs on corporate performance of breweries in Nigeria.

1.3     OBJECTIVES OF THE STUDY

The general objective of this study is to investigate the effect of indirect costs on the corporate performance of selected brewery companies in Nigeria. However, the following specific objectives were considered.

  1. To find out the extent to which factory electricity generation affects the level of corporate performance of brewery companies in Nigeria.
  2. To ascertain the relationship between product promotion and corporate
    performance of companies in Nigeria.
  3. To find out the effect of general expenses on the corporate performance of
    brewery industry in Nigeria.
  4. To determine the effect of cost of advertisement on the performance of the
    firm in Nigeria.

1.4     RESEARCH QUESTIONS

  1. To what extent does factory electricity generation affect the level of
    corporate performance of brewery companies in Nigeria?
  2. What   is   the   relationship   between   product   promotion   and   corporate
    performance of companies in Nigeria?
  3. What is the effect of general expenses on the corporate performance of
    brewery industry in Nigeria?
  4. What is the effect of advertisement costs on performance of the firms in Nigeria?

1.5     STATEMENT OF HYPOTHESES

Ho1              Factory electricity generation costs do not have significant effect on

the level of corporate profit of Brewery Companies in Nigeria
H 02                 Product promotion does not have significant effect on level of

corporate profits in Brewery companies in Nigeria.
H 03                        General Expense does not have significant effect on the level of

corporate profits in Brewery Companies in Nigeria.
Ho4             Advertisement costs do not have significant effect on the profit of the

firms in Nigeria.

1.6     SIGNIFICANCE OF THE STUDY

The benefits or level of achievement that shall accrue from this are numerous. Brewery Companies of Nigerian economy will benefit from result of this work as this will awaken enough consciousness towards proper and indirect costs management.

Government and investors both current and prospective will benefit from the result of the study. Researchers also, will find this work of great relevance, as a reference material to assist them in further research into similar areas of study in the future. Students of Accountancy and related discipline will find this work

useful for it will increase their understanding of cost management and level of

achievement.

1.7     SCOPE OF THE STUDY

The study will be confined to (20) twenty years data that is from 1993 to 2012. The study is based on secondary data collected from listed Brewery Companies in Nigeria Stock Exchange; the quality of the study depends purely upon the accuracy, reliability and quality of the secondary data source. The study is based on 2 companies selected from the total of 8 companies of the Brewery industry in Nigeria. These are Guinness Nigeria Plc and Nigerian Breweries Plc. The selection was based on the viability, years of existence, performance and asset base of the companies.

PROJECT TOPIC- EFFECT OF INDIRECT COSTS ON CORPORATE PROFITABILITY OF BREWERIES IN NIGERIA. A STUDY OF GUINNESS NIGERIA PLC AND NIGERIAN BREWERIES PLC

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