IMPACT OF INVENTORY VALUATION METHODS ON THE PROFITABILITY OF CHAMPION BREWERIES PLC

CHAPTER 1 INTRODUCTION

• INTRODUCTORY STATEMENT

The complex nature of today’s business world and the transformation of the entire world into a global village have been of great concern to managers of all forms of business organization. Because of this, managers are making conscious efforts researching on the most effective and efficient inventory valuation methods that will facilitate adequate profitability. The subject of this research is to determine the extent to which inventory valuation can facilitate profitability.

However, the word inventory, as known by the Americans and stock by British is indispensable in any manufacturing, merchandising and servicing organization. According to Welsch et al (1982: 222) “inventories are assets consisting of goods owned by the business at a particular time and held for future sales or for utilization in the manufacturing of goods for sales”. The types of inventories available differ depending on the nature of the business undertaking. For instance, a manufacturing company will make use of a raw material; work – in – progress and finished goods inventories, while trading organizations will make use of only finished goods inventories. Inventory generally represents an active asset because of their constant usage and replacement Pugh and seizer (1980: P .233). Therefore, the problem of safeguarding inventories is akin to protecting profit. The profitability of any manufacturing company is hindered by inadequately controlling the danger associated with inventory management. That is, over investment and under investment in inventory. Advisability of adequate stocking of items for sales, coupled with the risk of loss and cost of over stocking, create critical management planning and control problems. Failure to value inventories and to account for inventories can lead to business failure. Therefore in valuing inventory, the company’s objectives should be wealth maximization, which can be achieved by determining the optimum level of inventory sufficient for profit maximization.

However, inventory valuation in an organization is one of the key ingredients for efficient performance, which is further translation into profitability. Further more, inventory valuation involves the making of decision on the level of inventory that may be economically needed to meet the requirements for planned production and maximization of profit. Since all manufacturing companies are assumed to be “going concern”, long term survival, which comes from profitability is sometimes adjudged to be, the most important business objective. No manufacturing company can operate without material inputs, which in turn determine its output. Before any company is said to have effectively implemented its inventory valuation methods, there must have been an internal communications between different units and departments. The department of sales / marketing are the first to spot out changes in demand. This change must be worked into the company purchasing and manufacturing schedules, and the financial manager must arrange any financing that will be needed to support the inventory build-up. Therefore the neglecting of the inventory valuation will jeopardizes its long –run profitability and may fail ultimately.

• STATEMENT OF PROBLEM

In recent time emphasis has been layed on the importance of inventory valuation in manufacturing companies. This has help in solving most problems like Business failure, loss of sales, production stoppages and customer’s dissatisfaction. Although the potential benefits of improved inventory valuation are enormous, most companies fail to value inventory effectively.

When products purchased are delivered in several different batched,  at different prices, the products are mixed together in the store so that it is impossible to say whether the items remaining at the end of the period are part of the original opening stock or part of what has been purchased  during the period. This result in the problem of which price to use when valuing inventory.

Inventory valuation problem has been a recurring one. Is it due to the facts that there are several different inventory valuation methods or ignorance of the existence of such method?

Therefore, this study is undertaken to answer the following question:

1. Is a manufacturing company like champion Breweries aware of          the different inventory methods?
2. Which of these methods do they find most appropriate to use?
3. What problems do they faced in adopting this method?
4. Does the adoption of these methods have any impact on the          company profitability?
5. What benefits are derived from adopting these method?

• THE OBJECTIVES OF THE STUDY

Generally, the study was designed to examine the impact of inventory valuation method on champion Breweries profitability.

Specific objectives of the study were,

1. To assess the inventory valuation method(s) adopted by          Champion Breweries.
2. Make an inquired on which inventory valuation methods are most          appropriate.
3. Find out the problems encountered by this company by adopting this          method.
4. Assess the benefit derived from adopting the selected inventory          valuation methods.

• RESEARCH QUESTIONS

1. What is the basis of using inventory valuation method by Champion Breweries PLC?
2. What are the benefits derived by champion Breweries in adopting the inventory valuation method?
3. How does effective inventory valuation method create positive impact on the corporate profitability?

• SIGNIFICANCE OF THE STUDY  

The significance of the study lies in the fact that it would bring into focus and perspective the inadequacies in the application of inventory valuation by companies and the inherent problems associated with such adequacies. This study would be of assistance to the managers and those who help in the running of manufacturing companies, as they will be able to make decision on the level of inventory that may be economically needed to meet a requirement for planned production and profit maximization. Managers will be aware of the facts that when inventories are carried for a long period, it become impossible to sell them on time and at face value.

Also, this study shall help other business firms by providing useful insight on the current inventory valuation problems encountered by companies and help them achieved an overall objective that will minimize in total, the cost associated with inventory.

However, it will enhance more value to student, accounting practitioners, lecturers and management-of companies who may wish to evaluate the inventory valuation method and the resultant profitability on companies.

 1.5 SCOPES AND LIMITATION OF THE STUDY 

Under normal circumstances, the study of inventory valuation method on profitability is a broad topic that could be written extensively. This study is focus at a particular manufacturing company in Akwa Ibom state. This manufacturing company is selected based on its costing method, i.e. process costing. The selected company is champion Breweries plc of which my study is limited to.

The time for carrying out this study was limited because information must be collected, analyzed and documented. Cost, both real and opportunity, also constitutes another limiting factor. The most important limiting factor is time, cost, numbers of manufacturing companies in the state and respondents. Also, the poor attitude of some respondents towards the researcher approach for information, constituted another militating factor.

• ORGANIZATION OF THE STUDY

This study was organized into five (5) chapters. Accordingly, chapter one is sub-divided into the following headings: Introduction, statement of problem, the objectives of the study, scope and limitation of the study, organization of study, definition of terms and the brief historical background of champion Breweries plc.

Chapter two dealt with the review of related literature. This covers what writers know and has written on the research topic.

Chapter three was concerned with the research methodology. It deals with the introduction, research design, procedure for gathering Data, Population of the Study, Technique of selecting sample size and method of Data analysis.

Chapter four dealt with Data Presentation, analysis and interpretation. It covers the Introduction, Data presentation and Data Analysis.

Chapter five, being the last chapter, concentrated on the summary, conclusion and recommendation.

1.7 DEFINITION OF TERMS USED IN THE STUDY

1. Inventory Turnover: It measures the velocity or number of time (approximately) that stock is replenished in an Accounting period. (Frank wood and Alan Sangster, 1967. p. 374)
2. Lead or Procurement time: The period of time, expressed in weeks, days, months etc between ordering (either externally or internally) and replenishment i.e. when the goods are available for use.
3. Maximum Stock: A stock level selected as the maximum desirable which is used as an indicator to show when stock have risen to high. (Lucay, 2002: 42)
4. Buffer stock or minimum stock or safety stock: A stock allowance to cover errors in forecasting the lead time or the demand during the lead time (Ayandele, 2005. p.98)
5. Demand: The amount required by sales, production, it usually expressed as a rate of demand per month, week, etc. Estimate of the rate of demand during the lead time are critical factors in inventory control system.
6. Reorder level: The level of stock (usually free stock) at which a further replenishment order should be placed. The reorder level is dependent on the lead time and the rate of demand during the lead time.
7. Economic Ordering Quantity (EOQ) or Economic Batch Quantity (EBQ):This is a calculated reorder quantity which minimizes the balance of cost between carrying costs and ordering costs. (Lucay, 2002:42)
8. Reorder Quantity: This is the quantity of materials that has to be ordered any time stocks are to be replenished. The reorder quantity is sometimes referred to as the “Economic order Quantity” or the “optimal Quantity” (Eton, 2003.65)
9. First – in – First – out: This method assumes that stocks or materials are used in the same order as they are received into stores (Eton, 2003.84)
10. Last – in- First – out: This method assumes that materials are issued out from the latest items received into stores. Ibid (p.85)
11. Profitability: These measures indicate whether the company is performing satisfactorily. There are used among other things to measure the performance of management, to identify whether a company may be a worthwhile investment opportunity, and to determine a company’s performance related to its competitors. (Frank wood and Alan Sangster, 1967. p.368).
12. Inventory Valuation: This is a base used in valuing stock in a company. The procedure involves the stock to be issued first and deciding when and how much to order.

1.8 BRIEF HISTORICAL BACKGROUND OF CHAMPION BREWERIES PLC-UYO.

Champion Breweries Plc was incorporated as a private limited liability company on the 31st of July, 1974 with the same south East Breweries limited. The company’s name was changed from south East Breweries limited to Cross River Breweries limited and thereafter to Champion Breweries Plc on the 1st September, 1992.

The foundation stone of the Brewery was laid on the 19th of March, 1975 and on the 11th of December 1976, the Brewery was officially commissioned and its products, Champion Lager Beer launched into the market with success, with initial capacity of 150,000 hectoliters per annum.

The second expansion, which incorporate more sophisticated machinery, was completed and put on trail run in September 1979. The second production line was officially commissioned on the 11th of December 1979 with enhanced capacity of 500,000 hectoliters per annum. The same year the company’s products, “Champion Lager Beer” and “Champ Malta” won silver medal for quality at the 16th world selection for Beers and Non- Alcoholic Beverages in Luxemburg.

Consequent upon pressure of demand for its products, the company took a decision to double its capacity to one million hectoliters. This third expansion, which gulped substantial resources, could not be realized. The non-completion of the expansion programme coupled with lack of working capital and inadequate maintenance of the plants forced the company to close its doors for business between 1990 and 1991. All subsequent reactivation attempts did not yield the desired results

With the advent of democracy in Nigeria in May 1999, the Government of Akwa Ibom State made the reactivation of the brewery a cardinal activity. Consequently, the Akwa Ibom State Investment and Industrial Promotion Council (AKIIPOC) was charged with the responsibility to reactivate the company.

Pursuant of this mandate, AKIIPOC, in conjunction with the Board of Directors of the company, went to the market to solicit for core investors/technical managers. In the process, messrs Montgomery ventures incorporated of panama (with offices in Geneva, Switzerland) was identified and brought into the company as core investors/ technical managers after a memorandum of understanding was signed.

Based on the memorandum, a Reactivation committee was set up by the Board of the company to work with the core investors/ technical managers for the revamping of the company. The reactivation process, which commenced in February, 2000 lasted about Nineteen months. Now, the plant has been revamped and restructured to use one hundred percent locally sourced raw materials. The Brewery is now fully operational and the capacity is 500, 000 hectoliters per annum.