- INTRODUCTION
this chapter will cover all the below subtopics: background of the study, statement of the problem, general objective of the study, specific objectives, research questions, along with the relevance of the study conceptual framework, scope of the study, significance of the study and limitation of the study
Background of the study
fink treated and categorized the costs in a way that may be regarded similar to that of abs in the 1860s. each category varies with only certain service activities such as volume of freight and the number of train miles run.
in the late 19th and early 20th century. engineering managers such as f. Taylor and Emerson devised new cost management procedures primarily to assess and control financial and physical efficiency of processes. (kaplan, 1991). their aim was not to evaluate the overall profitability of the company, but to assess the efficiency of processes. by 1910, existing cost systems provided information relevant to a wide range of decisions concerning efficiency and product differentiation. these systems were designed to assign costs to products and product lines.
these practices came from the engineers, who were working in factories, rather than accountants or academics. this could explain why those new cost accounting and control techniques were rapidly adopted by organizations. in 1961shilling law and in 1962 Horngren published the first modern cost accounting textbooks with managerial (homgren, 1989) among cost management textbooks, the emphasis on cost control and management decision making shifted from 27% of the total chapters in 1945-50 to 54% in 1961-70. during the same periods, however, inventory valuation that comprised 73% of the textbook chapters in 1945-50 declined to 46%. this shows a growing interest of using cost accounting information in decision making, rather than simply for inventory valuation and financial reporting ((symonds), 2010)
in the 1980s some researchers began to complain about the current state of cost and management accounting. kaplan wrote several articles (see, for example, 1984a, 1984b, l 986b cooper and kaplan, 1987) and criticized traditional cost accounting systems. he claimed that those systems
distorted cost information since they were outmoded and could not capture the requirements of the new production environments. in the mid-1980s, johnson and kaplan (1987) published a book, relevance lost: the rise and fall of management accounting, in which they articulated their ideas about obsolescence of existing cost and management accounting systems (morgan & neil, 2012) two other researchers, j.g. miller and t.e. vollmann, published an article, the hidden factory (1985), in which they stated that overhead costs grew in percentage (more than 1,000%) as a result of automation in the electronics and mechanical equipment industries.
they also said that transactions, which took place in a factory. was the real cause of a large proportion of the overhead cost accumulated? therefore. they stated. if overhead costs were accumulated as a result of transactions, the key to managing overheads was to control the transactions that drove them. they then introduced “transaction-based costing”, in which the major transactions that may occur in a factory in electronic industry are divided into four groups as follows (miller and vollmann, 1985:145-146).
the article ·’hidden facto1y”, and a number of case studies performed in real manufacturing environments led robin cooper and r.s. kaplan, to introduce a new product costing system, which they referred to as “activity based costing”. in their article measure costs right: make the right decisions, cooper and kaplan (1988b) explained the system, and later, cooper (1990a:4-14) refined and organized the system by adding new concepts such as hierarchy of activities (miller and vollmann, l 985: 145-146).
these developments and new challenges to the traditional cost systems lead managerial accounting to a critical stage, in which its development and some of its conceptual foundations are being scrutinized as never has been done before (shillinglaw, 1989). these latest developments also make the researchers optimistic about the future of modern cost management.
horngren (1989), for example, expected the coming years to be fruitful in research and teaching, of management accounting, and johnson (1990a: 144) stated that the appearance of new articles and cases may signal that cost management, which has been lost since the beginning of this century, was returning to the manufacturing firms (symonds, 2010).
problem statement
An organization’s financial performance is heavily influenced by its cost management strategies in the fiercely competitive business world of today. Companies’ knowledge of how particular cost management techniques directly impact financial performance measures, however, is severely lacking. Businesses trying to optimize their cost control techniques and allocate resources efficiently have a problem due to this information gap.
The issue at hand is a lack of thorough knowledge regarding the precise impacts that different cost management strategies have on financial performance. Although it is often known that cost management is crucial for preserving profitability and fostering growth, it is still unknown how precisely cost management techniques affect financial performance measures.
This knowledge gap makes it more difficult for organizations to create well-informed cost-cutting, resource-allocation, and decision-making strategies. Organizations may find it difficult to identify and prioritize the most cost-effective cost-saving strategies, leading to less-than-ideal financial outcomes, unless they have a deeper grasp of how various cost management practices impact financial performance.
Furthermore, firms are facing more and more difficulties in trying to reduce expenses while improving financial performance in a time of rising cost pressures, unstable markets, and changing client needs. Addressing this information gap and researching the connection between cost management strategies and financial performance is therefore essential to helping organizations make data-driven decisions, enhance their overall financial health, and stay competitive in the market
Research objectives
this study capitalized on the three objectives stated below;
General objective
the general objective of this study was to examine the effect of cost management practices on financial performance of towfiiq general trading company.
Specific objective
⦁ To determine the level of cost management practice of towfiiq general trading company
⦁ To find out the level of financial performance of towfiiq general trading company
⦁ To find out the relation between cost management practice and financial performance of towfiiq general trading company.
Research questions
⦁ What is the level of cost management practice of towfiiq general trading company?
⦁ what is the level of financial performance of towfiiq general trading company?
iii. what is the relationship between cost management practice and financial performance of towfiiq general trading company?
Definition of key terms
A cost is the value of money that has been used up to produce something or deliver a service,
and hence is not available for use anymore. in business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. in this case, money is the input that is gone in order to acquire the thing.
Cost management is the process of planning and controlling costs in order to increase efficiency and decrease expenses. This involves identifying and analyzing all costs associated with a particular product or service, and then taking actions to minimize those costs. By managing costs, a business can successfully control its expenditures and increase profitability.
Financial performance is a measure of a company’s overall financial health and ability to generate revenue. It is determined by analyzing various financial metrics, such as revenue growth, profit margins, return on investment, and cash flow. A business with strong financial performance is likely to be seen as a more stable and reliable investment opportunity. In this study was measured on a 5 point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not- sure (2.60 – 3.39), Agree (3.40 – 4.19) and Strongly Agree (4.20 – 5.0).
Material costs refer to the tangible goods or supplies used in the manufacturing process. These costs can be direct (e.g. raw materials) or indirect (e.g. packaging materials). Managing material costs is important for businesses in order to ensure that they are obtaining the best possible prices for their supplies, and avoiding waste through careful inventory management. In this study was measured on a 5 point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not-sure (2.60 – 3.39), Agree (3.40 – 4.19) and Strongly Agree (4.20 – 5.0).
Labor costs refer to wages and salaries paid to employees involved in manufacturing. These costs can be significant for businesses, particularly those in labor-intensive industries. Managing labor costs involves balancing the need for skilled employees with the cost of employing them, as well as ensuring that staff are being utilized effectively. In this study was measured on a 5 point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not-sure (2.60 – 3.39),
Agree (3.40 – 4.19) and Strongly Agree (4.20 – 5.0).
Overhead costs refer to those costs that are related to production, but are not directly attributed to labor or materials. These can include expenses such as rent, utilities, and depreciation of equipment. Managing overhead costs involves identifying areas where expenses can be minimized, such as by negotiating better lease or utility rates. In this study was measured on a 5 point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not-sure (2.60 – 3.39),
Agree (3.40 – 4.19) and Strongly Agree (4.20 – 5.0).
Financial efficiency is a measure of how effectively an organization is using its resources to generate revenues. This can be assessed by comparing revenue growth to investment in various projects or initiatives. Financial productivity, on the other hand, is a measure of output per unit of input. This can be assessed by analyzing the relationship between labor and capital inputs and revenues generated. Both financial efficiency and productivity are important measures of a business’s overall financial health. In this study was measured on a 5-point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not-sure (2.60 – 3.39), Agree (3.40 –
4.19) and Strongly Agree (4.20 – 5.0).
Financial productivity is an important metric for businesses because it allows them to assess how efficiently they are using their resources to generate revenue. By analyzing the relationship between input (labor and capital) and output (revenue), businesses can determine whether they are maximizing their return on investment. Higher financial productivity means that a business is generating more revenue for every unit of input, which can lead to increased profitability and growth. In this study was measured on a 5-point Likert scale interpreted as Strongly Disagree (1.00-1.79), Disagree (1.80 – 2.59), Not-sure (2.60 – 3.39), Agree (3.40 – 4.19) and Strongly
this study was based on establishing the relation between cost management practices and financial
performance in towfiiq general trading co while – capitalizing on the three elements of cost which include labor, materials and overheads.
geographical scope
this research was conducted in towfiiq general trading co. located garowe puntland somalia. this place is located this area was used because it is near the researcher residential area and institution which made it easier during data collection. this place was also selected because the researcher believed that there was enough information about cost management which was the area of study.
Time scope
this research was conducted for a period of 3 months (that is, march 2024 to june 2024). this period was used because the researcher believed that they would be able to coherently gather information from respondents as it would enable them (respondents) to give responses that are typical for their opinion from observations to be made over the period.
Significance
completion of this researcher will be used in different ways including the following
⦁ this research paper will be of prime benefit to the management and staff of towfiiq gneral trading co, since it will enable them identify and understand the benefits associated with cost management and financial performance.
⦁ this information will also be of great importance to other business companies and bodies that have adopted and those that are yet to adopt the effectiveness of cost management practices in knowing the pressure
⦁ points to be emphasized and well managed in order to pursue the system successfully
the study will also be of great benefit to the students who will be able to access this information that will guide them in research and equip them with knowledge as far as cost management and financial performance is concerned.
limitations of the study
here are some of the challenges during the study:
⦁ there are no available public libraries that the researcher use to gather data concerning the study, also no research is conducted before the research regarding the issues under study in somalia. the researcher faces to research which no further foundation or study has been made before in this environment.
⦁ some of the respondents are not willing to give proper answers. so, they give socially acceptable answers to hide the real problems in their organizations.
⦁ Limited Access to Information
⦁ some selected respondents my be difficult to get reliable information
