THE EFFECT OF MARGINAL COST ELEMENTS ON THE FINANCIAL PERFORMANCE OF PHARMACEUTICAL COMPANIES IN NIGERIA

THE EFFECT OF MARGINAL COST ELEMENTS ON THE FINANCIAL PERFORMANCE OF PHARMACEUTICAL COMPANIES IN NIGERIA

ABSTRACT

The broad objective of the study is to evaluate the effect of marginal cost elements on financial performance or pharmaceutical companies in Nigeria using GlaxoSmithKline consumers’ plc, May and Baker Nig. Plc, Neimeth international, may and Baker Nig. Plc as case studies. The specific objective however is to examine the impact of cost of sales, cost of research and development and selling and administration expenses on the ROA of the quoted companies. Five years secondary data from the annual report and accounts of the three companies quoted on the Nigeria stock exchange were collected and regression analysis was utilized in the data analysis. The study found a negative and insignificant relationship between cost of sales and ROA. Also, cost of research and development was found a negative and insignificant relationship with the ROA. Finally, selling and administration expenses had a positive but insignificant relationship with ROA. The study recommends that against others, marginal must be minimized to the barest minimum so as to maintain a high level of profitability.

TABLE OF CONTENTS

Title page ii

Certification Page iii

Approval page iv

Dedication v

Acknowledgment vi

Abstract vii

Table of contents viii

CHAPTER ONE

Introduction

1.1 Background of the study 1

1.2 Statement of the problem 3

1.3 Objectives of the study 5

1.4 Research questions 7

1.5 Research hypotheses 8

1.6 Significance of the study 9

1.7 Scope and limitation of the study 10

1.8 Definition of terms 12

CHAPTER TWO

Related Literature Review

2.1 Definition of marginal cost 14

2.2 The principles of marginal costing 16

2.3 Marginal Cost Element 17

2.4 Marginal costing and decision making 20

2.5 Financial statements as yardsticks for measuring

financial performance. 23

2.5.1Categories of financial statements 25

2.5.2Purpose of financial statement by business entities 27

2.6 Analysis of financial statements 27

2.7 Management accounting theory of variable cost 36

2.8 Theory of productivity 40

References 47

CHAPTER THREE

Research Design and Methodology

3.1 Research design 48

3.2 Area of study 48

3.3 Population of study 48

3.4 Sample size 48

3.5 Sources of data 48

3.6 Analytical method/technique 48

CHAPTER FOUR

Presentation and Analysis of Data

4.1 Analysis of data 52

4.2 Granger causality tests 53

4.2.1Analysis of description statistics 55

4.3 Presentation of analysis result 43

4.3.1Analysis of regression result 62

4.4 Interpretation of Findings 64

CHAPTER FIVE

Summary of Findings, Conclusion and Recommendations

5.1 Summary of findings 66

5.2 Conclusion 67

5.3 Recommendations 69

Bibliography 71

Appendix

CHAPTER ONE

INTRODUCTION

1.9 BACKGROUND OF THE STUDY

Recently the common concern to every participant in a market economy is the magnitude at which price of goods are multiplied in recent time in Nigeria. This is in addition to the multiplier effects associated with the process of transacting business in Nigeria for instance as customers complain bitterly of exorbitant prices likewise pharmaceutical companies remain worried about how profitability returns in the face of ever increasing competition. Even low buying power of customer, low capacity utilization and international market that are characterized by differentiated products. As a result customers shift from one product to another in search of value that rarely comes despites their reaches to purchase. They are all confronted with higher price low quality adulteration and at times temporary scarcity in place of value for money objectives they pursue. The management of different companies also seeks for cover everywhere to justify low profitability return while trying to checkmate competition and its resultant effect on financial performance caused by product proliferation and limitations.

To satisfy the above multifarious requirement, pharmaceutical companies are advice to apply marginal cost elements which refer to the value of what is given up in order to produce that additional unit which are practically applied by evaluation of performance, profit planning through calculation of present value (PV) ratio of company to plan the activities in such a way that the profit can be actualized fixation of selling price decision making and cost control which help to increase profitability of a company. Therefore, it cost management is to be there should be added up and be managed by competent hands. Financial performance of a pharmaceutical company uses financial statement analysis as the most objective way to evaluate financial performance.

Financial analysis involves assessing the leverages profitability operational efficiency and solvency for company financial ratios are the principal tools used to conduct the analysis and the challenge knows which ratios to choose from and how to interpret the results.

1.10 STATEMENT OF THE PROBLEM

This research is primarily carried out by marginal cost elements available to some pharmaceutical companies in Nigeria more also it goes ahead to relate the financial performance of these pharmaceutical companies to direct material direct labor and overhead respectively. Hence the research aims at evaluating financial performance of pharmaceutical companies using the marginal cost element as a yard stick.

Marginal costing is a techniques used in reporting costs and profit of a firm. There should be separation of cost into fixed and variable costs. In marginal costing product cost include variable production cost such has direct material, direct labor, direct production overhead expenses. It ignores fixed cost and semi-variable cost. The separation of cost into fixed and variable cost is difficult, in reality manufacturing can’t take place without plant facilities and equipment hence fixed manufacturing cost are part of the production and should not be excluded.

Marginal costing fail as to take into consideration that in the long run, fixed cost will be part of the total cost of production than of a unit of an item. It is therefore not an appropriate tool in making pricing decision of a firm.

In the preparation of profit and loss account, the use of marginal cost is limited to the internal parties of a firm such as the management. In computing profit for tax purpose, marginal costing is not accepted method, because it does not include all cost used in production process. Therefore in preparation of profit and loss account meant for external uses such as shareholder investors, government and the public, using marginal costing will not present true and fair view of the financial affairs of the firm.

1.11 OBJECTIVES OF THE STUDY

The primary objective of the study is to evaluate the effect of marginal cost element on financial performance pharmaceutical companies in Nigeria using Glaxosmithkline consumers’ plc, may and baker Nigeria plc, Neimeth international as case studies as well as determines its impact with respect to their profitability.

Above all, this study aims at highlighting the various marginal cost elements and it contributions to the effectiveness and efficient running of pharmaceutical companies.

The specific objectives of the study are

1) To ascertain the relationship between cost of sales and financial performance to pharmaceutical companies in Nigeria.

2) To determine the relationship between research and development expenses and financial performance of pharmaceutical companies in Nigeria.

3) To determine the relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.

1.12 RESEARCH QUESTION

The following question would be consider relevant for the study based on the objectives of the study:

1) What extent is cost of sales related financial performance?

2) What kind of relationship exists between research and development expenses and financial performance of pharmaceutical companies in Nigeria?

3) To what extent is selling and administered expense related to financial performance of pharmaceutical companies in Nigeria?

1.13 RESEARCH HYPOTHESIS

In this research work the researcher formulated a number of research hypothesis in which the study will be based on. The hypothesis used includes null hypothesis “Ho” and alternative hypothesis “Hi”.

Ho: There is no significant relationship between cost of sales and financial performance pharmaceutical companies in Nigeria.

Hi: There is a significant relationship between cost of sales and financial performance pharmaceutical companies in Nigeria.

Ho: There is no significant relationship between research and development expenses and financial performance of pharmaceutical companies.

Hi: There is a significant relationship between research of pharmaceutical companies.

Ho: There is no significant relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.

Hi: There is significant relationship between selling and administration expenses and financial performance of pharmaceutical companies in Nigeria.

1.14 SIGNIFICANCE OF THE STUDY

The aim of this study is to stimulated the interest of people on the implication of marginal cost on the financial performance of pharmaceutical companies and how it would further serve as a guide or reference for the younger and future researcher who may carryout research investigation in this area of study. It will in no doubt be of no importance to the companies using case studies of Glaxosmithkline consumers plc, may and Baker Nig. Plc, Neimeth international, because the findings will assist the companies in the following areas: increases the company’s profit marginal, help in reduction of marginal costs, help in the proper classification of the marginal cost into variable and fixed costs.

1.15 SCOPE AND LIMITATION OF THE STUDY

This research work is central on the effect of marginal cost element on the financial performance of pharmaceutical companies specifically Glexosmithkline consumer plc, may and Baker Nigeria plc, and Neimeth international and will endeavor to show all relevant information that will enhance the actualization of the research objectives put into place. The researcher would have carried out research work into a big and well known company but for the constraints that confronted there she limited her research works to the nearest pharmaceutical company specifically. The researcher was constrained by the following problems.