IMPACT OF INVENTORY VALUATION METHODS ON THE PROFITABILITY OF CHAMPION BREWERIES PLC
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IMPACT OF INVENTORY VALUATION METHODS ON THE PROFITABILITY OF CHAMPION BREWERIES PLC
Chapter 1: Introduction
INTRODUCTIONAL STATEMENT
The complexity of today’s corporate environment, as well as the transformation of the entire world into a global village, have caused tremendous concern among managers in all types of company organisations.
As a result, managers are focusing their efforts on finding the most effective and efficient inventory valuation procedures that will allow them to maintain appropriate profitability. The purpose of this study is to assess the extent to which inventory value can improve profitability.
However, the term inventory, as used by Americans, and stock by the British, is essential in any manufacturing, commerce, and service organisation.
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 utilisation in the manufacturing of goods for sales” .
The sorts of inventories accessible vary according on the nature of the company enterprise. For example, a manufacturing company will utilise raw materials, work-in-process, and finished goods inventories
whereas a trade organisation will only use finished goods inventories. Inventory is often considered an active asset due to its ongoing use and replacement Pugh and Seizer (1980: P.233).
As a result, the challenge of inventory safeguarding is similar to profit protection. Any manufacturing company’s profitability suffers when the risk associated with inventory management is not appropriately controlled.
That is, over and underinvestment in inventory. The inadequacy of stocking things for sale, along with the danger of loss and the cost of overstocking, creates key management planning and control issues.
Failure to value or account for inventories might result in business failure. As a result, when valuing inventory, the company’s goals should be wealth maximisation, which can be accomplished by finding the optimal level of inventory required to maximise profits.
However, inventory value in an organisation is a critical component for efficient functioning, which translates into profitability. Furthermore, inventory valuation entails determining the amount of inventory that is economically required to meet the requirements for planned production and profit maximisation.
Because all manufacturing organisations are supposed to be “going concerns,” long-term survival, as measured by profitability, is sometimes regarded as the most important business goal. No manufacturing company can function without material inputs, which ultimately decide output.
Before a corporation can claim to have effectively applied its inventory valuation procedures, there must have been internal communication among various units and departments.
The department of sales and marketing is the first to notice changes in demand. This modification must be included into the company’s purchasing and manufacturing schedules
and the financial management must arrange any financing required to support the inventory buildup. As a result, failing to value inventory jeopardises the company’s long-term profitability and may lead to its failure.
STATEMENT OF PROBLEM
In recent years, emphasis has been placed on the necessity of inventory value in manufacturing businesses. This has helped to solve the majority of difficulties, including business failure, sales loss, production stoppages, and consumer dissatisfaction. Despite the significant benefits of enhanced inventory valuation, most businesses fail to value inventory efficiently.
When products are delivered in multiple batches at different prices, they are mixed together in the store, making it impossible to determine whether the items remaining at the end of the period are part of the original opening stock or what was purchased during the period. This raises the question of which price to use when valuing inventory.
The inventory valuation problem has been a persistent issue. Is it because there are so many distinct inventory valuation methodologies, or because people are unaware of the existence of such a method?
As a result, this study is conducted to answer the following question:
Is a manufacturing firm such as Champion Breweries aware of the various inventory methods?
Which of these strategies do they believe is most appropriate to use?
What challenges did they confront in implementing this method?
Does the use of these strategies have an impact on the company’s profitability?
What are the benefits of using these methods?
The Objectives Of The Study
In general, the study sought to investigate the impact of the inventory valuation method on Champion Brewery’s profitability.
The study’s specific aims were:
To evaluate the inventory valuation methods used by Champion Breweries.
Make inquiries about which inventory valuation methodologies are most appropriate.
Using this strategy, you can learn about the issues that this organisation has faced.
Determine the advantage of using the given inventory valuation methodologies.
RESEARCH QUESTIONS:
What is the rationale for Champion Breweries PLC’s use of the inventory valuation method?
What are the advantages that Champion Breweries gain by using the inventory valuation method?
How do good inventory valuation methods improve corporate profitability?
Significance of the Study
The study’s significance stems from the fact that it will bring to light and perspective the shortcomings in the use of inventory valuation by businesses, as well as the inherent problems that come with such deficiencies.
This study would benefit managers and others involved in the operation of manufacturing organisations by allowing them to make decisions on the quantity of inventory that may be economically required to meet a demand for projected production and profit maximisation.
Managers will be aware that holding inventories for an extended period of time makes it impossible to sell them on time and at face value.
Furthermore, this study will assist other businesses by offering important insight into the present inventory valuation challenges encountered by organisations, as well as assisting them in achieving an overall goal of minimising the entire cost connected with inventory.
However, it will add additional value to students, accounting practitioners, lecturers, and company management who may want to examine the inventory valuation approach and the resulting company profitability.
1.5 Scope and Limitations of the Study
Under normal circumstances, the impact of inventory valuation methods on profitability is a vast issue that might be fully researched. This study focuses on a specific manufacturing company in Akwa Ibom state.
This manufacturing company was chosen based on its costing method, process costing. The chosen company is Champion Breweries plc, to which my research is confined.
This study had a limited time frame because information needed to be collected, analysed, and documented. Cost, both real and opportunity, is another limiting issue.
The most significant limiting factors are time, cost, the quantity of manufacturing enterprises in the state, and respondents. Another contributing aspect was some respondents’ negative attitudes about the researcher’s approach to gathering information.
Organisation of the Study
This study was divided into five chapters. As a result, chapter one is separated into the following sections: introduction, statement of problem, study objectives, study scope and limitations, study organisation, term definitions, and a brief historical overview of Champion Breweries plc.
The second chapter dealt with a review of related literature. This covers what the writers know and have written on the research topic.
The third chapter focused on research technique. It discusses the introduction, research design, data collection procedures, study population, sample size selection technique, and data analysis method.
Chapter four focused on data presentation, analysis, and interpretation. It includes the introduction, data display, and data analysis.
Chapter five, the final chapter, focused on the summary, conclusion, and recommendations.
1.7 Definition of Terms Used in the Study.
Inventory Turnover: It indicates the rate or number of times (roughly) that stock is refreshed in an accounting period. (Frank Wood and Alan Sangster, 1967; p. 374)
Lead or procurement time: The amount of time between ordering (either externally or internally) and replenishment, when the items are ready for usage.
Maximum Stock: A stock level chosen as the most desirable, which is used as an indicator to signal when the stock has climbed to a high level. (Lucay, 2002:42)
Buffer stock, minimum stock, or safety stock. A stock allowance to compensate for inaccuracies in predicting the lead time or demand during the lead time (Ayandele, 2005, p. 98).
Demand: The amount necessary for sales and manufacturing; it is typically expressed as a demand rate per month, week, etc. Estimating the pace of demand throughout the lead period is crucial in an inventory control system.
Reorder level: The amount of stock (typically free stock) at which a new replenishment order should be sent. The reorder level is determined by the lead time and the rate of demand at that period.
Economic Ordering Quantity (EOQ) or Economic Batch Quantity (EBQ): This is a determined reorder quantity that balances carrying and ordering costs. (Lucay, 2002: 42).
Reorder Quantity: This is the number of materials that must be ordered each time stocks are refreshed. Eton (2003.65) refers to the reorder quantity as the “economic order quantity” or the “optimal quantity.”
First-in, first-out: This strategy proposes that inventories or materials are used in the same order they are received into stores (Eton, 2003.84).
Last-in, first-out: This strategy presupposes that materials are supplied based on the most recent goods obtained in retailers. Ibid (p. 85).
Profitability: These indicators show whether the company is doing satisfactorily. They are used, among other things, to assess management performance, decide whether a company is a viable investment opportunity, and determine a company’s performance in comparison to its competitors. (Frank Wood and Alan Sangster, 1967, p. 368).
Inventory valuation is a method for determining the value of a company’s stock. The approach entails selecting the stock to be issued initially and deciding when and how much to order.
1.8 BRIEF HISTORICAL BACKGROUND OF CHAMPION BREWERIES PLC-UYO.
Champion Breweries Plc was founded as a private limited liability business on July 31, 1974, with South East Breweries Limited. The company’s name was changed from South East Breweries Limited to Cross River Breweries Limited, and then to Champion Breweries Plc on September 1, 1992.
The foundation stone of the brewery was laid on March 19, 1975, and on December 11, 1976, the brewery was officially commissioned, and its products, Champion Lager Beer, were successfully put into the market, with an initial capacity of 150,000 hectoliters per year.
The second extension, which included more modern technology, was finished and tested on the trails in September 1979. The second production line was formally commissioned on December 11, 1979, with an increased capacity of 500,000 hectolitres per year.
The same year, the company’s “Champion Lager Beer” and “Champ Malta” won a silver award for quality at the 16th World Selection for Beers and Non-Alcoholic Beverages in Luxemburg.
In response to increased demand for its products, the company decided to raise its capacity to one million hectoliters. This third enlargement, which required significant expenditures, could not be completed.
The company’s failure to complete the expansion strategy, along with a shortage of operating capital and inadequate plant maintenance, prompted it to close for operation between 1990 and 1991. All subsequent reactivation efforts failed to produce the anticipated outcomes.
With the establishment of democracy in Nigeria in May 1999, the government of Akwa Ibom State made reactivating the brewery a top priority. Consequently, the Akwa Ibom State Investment and Industrial Promotion Council (AKIIPOC) was charged with the job of reactivating the corporation.
As part of this assignment, AKIIPOC, in collaboration with the company’s Board of Directors, went to the market to seek core investors/technical managers. Messrs Montgomery Ventures incorporated of Panama (with offices in Geneva, Switzerland) was discovered and brought into the company as core investors/technical managers following the signing of a memorandum of understanding.
According to the memorandum, the company’s Board of Directors established a Reactivation committee to collaborate with key investors/technical managers on the company’s revamping.
The reactivation process, which began in February 2000, lasted around nineteen months. The plant has been completely rebuilt and reconstructed to use only locally obtained raw materials. The brewery is currently fully operating, with a capacity of 500, 000 hectolitres per annum.
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