MAKERERE UNIVERSITY

COLLEGE OF EDUCATION AND EXTERNAL STUDIES

SCHOOL OF DISTANCE AND LIFELONG LEARNING

BACHELOR OF COMMERCE EXTERNAL

TOPIC:

PRODUCTION COST VARIANCE AND PROFITABILITY LEVELSIN

SMALL SCALE POULTRY FARMERS: A CASE STUDY OF AGALI AWAMU WOMEN’S DEVELOPMENT

GROUP IN NALUVULE VILLAGE NANSANA TOWN COUNCIL, WAKISO DISTRICT

BY: NAMUBIRU ANNET07/U/12942/EXT

207015354

SUPERVISOR: Mr. KAMUKAMA NIXON

A RESEACRH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF BACHELOR OF COMMERCE DEGREE OF MAKERERE UNIVERSITY

JUNE 2011

DECLARATIONI Namubiru Annet do declare that this is my original work and has never been used in any

examination for any award.

Signature: .............................................. Date: ......................................

NAMUBIRU ANNET

(RESEARCHER)

i

APPROVALThis report was carried out under my supervision and is ready for submission.

Signature: ................................................ Date:........................................

Dr. KAMUKAMA NIXON

(SUPERVISOR)

ii

DEDICATIONI would like to dedicate this research project to the Family of Salongo and Nalongo

Musisi David Ssakaaza. Thank you for educating me, loving and supporting me, and now

I am a responsible citizen of Uganda.

iii

ACKNOWLEDGEMENTI would like to first of all acknowledge my supervisor, Dr. Kamukama Nixon for the

guidance and encouragement that has enabled me to successfully accomplish my research

project.

Special thanks go to the family of Mr and Mrs. Sembatya Jacob who have financed my

research project staring from as early as its initial stages up to its completion. May God

bless you.

Thanks go my brothers, Julius, Jeremiah, Stanley, Wilson and Christopher, as well as my

sisters, Winfred, Allen and Esther, for standing by my side and showing me that you

cared through out this research. May God bless you.

My sincere appreciation still goes to the members of Agali Awamu Women’s

Development Group. For their openness and willingness to avail me with the information

required for research. Especially the administrators, Mr. Sentongo Eridad Mukasa, Mrs.

Semata Hellen and M/s Nabadda Jackline. May God bless you.

And lastly, special thanks go to my group discussion members:- Sadhat, Jackrine,

Martha, Allan, Moses, Doreen, Peter and Paul. For your efforts through encouraging

guidance, may God bless you.

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TABLE OF CONTENTSDECLARATION............................................................................................................................. i

APPROVAL................................................................................................................................... ii

DEDICATION............................................................................................................................... iii

ACKNOWLEDGEMENT............................................................................................................. iv

TABLE OF CONTENTS................................................................................................................v

LIST OF TABLES.......................................................................................................................viii

CHAPTER ONE : INTRODUCTION....................................................................................1

1.1 Background to the Study...........................................................................................................1

1.2 Problem Statement....................................................................................................................2

1.3 Purpose of the Study.................................................................................................................3

1.4 Objectives of the Study...........................................................................................................3

1.5 Research Questions...................................................................................................................4

1.6 Scope of the Study..................................................................................................................4

1.6.1 Subject Scope.......................................................................................................................4

1.6.2 Geographical Scope...............................................................................................................4

1.6.3 Time Scope............................................................................................................................4

1.7 Significance of the Study..........................................................................................................5

CHAPTER TWO : LITERATURE REVIEW........................................................................6

2.1 Introduction..............................................................................................................................6

2.2 Production Cost Variance.........................................................................................................6

2.2.1 Definition of Production Cost Variance.................................................................................6

2.2.2 Types of cost variances..........................................................................................................7

2.2.3 Forms of cost variance...........................................................................................................8

2.2.4 Cost variance and standard costing and budgetary control...................................................12

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2.3 Cost variance and decision making.........................................................................................12

2.4 Profitability.............................................................................................................................13

2.4.1 Profitability Analysis...........................................................................................................14

2.4.2 Cost information and profit setting......................................................................................14

2.5 Cost variance in relation to profitability..................................................................................14

2.6 Small scale production and private sector development..........................................................15

CHAPTER THREE : METHODOLOGY............................................................................17

3.1 Introduction............................................................................................................................17

3.2 Research Design.....................................................................................................................17

3.3 Sampling Design.....................................................................................................................17

3.3.1 Sample Size.........................................................................................................................17

3.3.2 Sampling Procedure.............................................................................................................18

3.4 Data Collection Methods........................................................................................................18

3.4.1 Primary data.........................................................................................................................18

3.4.2 Secondary data.....................................................................................................................19

3.4.3 Data collection methods.......................................................................................................19

3.5 Data Processing, Analysis and Presentation............................................................................20

3.5.1 Data Processing....................................................................................................................20

3.5.2 Data analysis........................................................................................................................20

3.5.3 Data presentation.................................................................................................................20

3.5.4 Difficulties encountered during the study............................................................................21

CHAPTER FOUR : PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS............................................................................................................................22

4.1 Introduction............................................................................................................................22

4.2 Results from section one of the questionnaire concerning the respondents’ personal information...................................................................................................................................22

vi

4.2.1 Responses from section two of the questionnaire concerning the Extent to which production costs are monitored through record keeping...............................................................27

4.2.2 Responses from section three of the questionnaire concerning the evidence of the occurrence of Variance in Production Costs.................................................................................31

4.2.3 Responses from section four of the questionnaire concerning the Effects of Cost Variance on the profitability of the group....................................................................................................36

4.2.4 Responses from the fifth section of the questionnaire concerning the Analysis of Profitability and counter practices on cost variance......................................................................41

4.3 Responses from the interview guide used to collect information...........................................43

4.4 Establishing the relation ship between productions cost variance and profitablity levels......46

CHAPTER FIVE : DISCUSSION, CONCLUSION, RECOMMENDATION AND SUGGESTION FOR FURTHER RESEARCH....................................................................49

5.1 Introduction............................................................................................................................49

5.2 Summary of the major findings of the study...........................................................................49

5.2.1 Findings on the impact of cost variance on the profitability levels of Agali Awamu Women’s Development Group.....................................................................................................49

5.2.2 Findings on evaluating the impact of production cost variance on the profits of Agali Awamu Womens’ Development Group........................................................................................50

5.2.3 Findings on the effectiveness and appropriateness of the cost variance controls used by Agali Awamu Womens’ Development Group..............................................................................50

5.2.3 Findings on the relationship between production cost variance and the profitability levels of the group.......................................................................................................................................51

5.2 Conclusion..............................................................................................................................52

5.3 Recommendations...................................................................................................................53

5.4 Suggestion in areas of further study........................................................................................53

REFERENCES.............................................................................................................................54

Appendices............................................................................................................................56

Appendix I Reseaech questionnaire on production cost variance and profitability levels.............56

Appendix II : An interview guide for the research on production cost variance and profitability levels.............................................................................................................................................61

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LIST OF TABLES

Table 1: The table showing the persistent decrease in the group’s profits for the period 2007 – 2010......................................................................................................................3

Table 2: Showing the distribution of the sample size for the research....................................18

Table 3: Showing the gender distribution of the respondents.................................................22

Table 4: showing the ages of the respondents.........................................................................23

Table 5: Showing the level of experience that group members have in the poultry business................................................................................................................................25

Table 6: Showing the positions held by respondents with in the group..................................26

Table7: Showing the response on whether all information concerning costs is recorded......27

Table 8: Showing the Response on the completeness of the cost information recorded........28

Table 9: Showing the responses towards the various documents used to record cost information............................................................................................................29

Table 10: Showing response on whether there is an existing mechanism to control cost variance..................................................................................................................31

Table 11: showing the responses on the frequency of existence of production cost variance.32

Table 12: Showing the response on whether the group sets standard costs and expected profits.....................................................................................................................33

Table 13: Showing the response on the methods used by the group when setting standard costs.......................................................................................................................34

Table 14: Showing the response on the criteria used by the group when setting the selling price for their products...........................................................................................35

Table 15: Showing the responses on the occurrence of Production Cost Variance...............36

Table 17: Showing the responses on the Effect of Production Cost Variance and the Profitability of the group.......................................................................................39

Table 18: Showing the response on the effect of inadequate information on cos ascertainment and profits of the group..........................................................................................40

viii

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND TO THE STUDYCost variance is the difference between the standard cost and the actual cost incurred

during a given production period. (Arora, 2006). On the other hand, cost variance can as

well be defined as the divergence between the predetermined costs and the actual costs

incurred. (Atukunda, 2004)

Cost variance results from the changes in the estimated costs of labour, materials, and

production overheads. Cost variance drivers are usually witnessed in form of changes in

time labour spends to accomplish a task, changes in labour quality, and pay rates,

changes in material prices, quality and quantity required to produce. Sales variance on the

other hand occurs due to stiff and un leveled ground competition, and complex product

designs. To hedge against cost variances firms usually work under standard costs.

Standard cost is a predetermined cost to be incurred under efficient operating conditions.

(Drury, 1998). Standard costs are also known as predetermined costs based on technical

estimates for materials, labour, and overheads for a selected period of time for a

prescribed set of working conditions.

However, in reality, perfect operating condi0tions do not exist due to the uncertainties

that exist in the macro economic environment (Pandey, 1998). These uncertainties in

most cases cause an adverse variance on the production costs that the divergence erodes

the profits of the firm.

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Profitability is the state where the firm’s total revenues are exceeding the total

expenditures at the region above the break even point. (Bamwine, 2004). Profits are an

important aspect for any firm since they avail accessibility of the firm to different

investments and growth. Any adverse variance in the production costs can easily have a

negative impact on the profits of the firm.

Operating profit variance is the difference between the budgeted and actual operating

profits for the period. (Lucey, 2004). This arises from the change in the production costs

as evidenced through having poor quality material inputs, poor labour quality, and

substandard operating processes. The existence of such limiting factors, because an

unfavourable increase in the production costs which ultimately affects the profits of the

firm negatively. (Atukunda, 2004).

1.2 PROBLEM STATEMENTAgali Awamu Women’s Development Group, has been in existence for the last ten years.

However, for the last four years, the group has been registering steady decrease in the

profit levels, despite the fact that the group registers profits on an annual basis. The

situation of the group’s profit performance is evidenced in the financial records of the

group for the last four years presented in table below.

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Table 1: The table showing the persistent decrease in the group’s profits for the period 2007 – 2010.Year Production Sales Profitability

Units

produced

Unit

cost

Production

cost

Unit selling

priceTotal sales

2007 44300 100 4430000 200 13290000 88601000

2008 32000 150 4800000 250 12800000 8000000

2009 24248 180 4364640 300 11636040 7271400

2010 23748 250 5937000 300 13061000 7124400

Source: Accounts and finance department financial report summary 2007 – 2010.

1.3 PURPOSE OF THE STUDYThe purpose of the study was to investigate the relationship between production cost

variance and profitability levels of Agali Awamu Women’s Development Group.

1.4 OBJECTIVES OF THE STUDY To evaluate the impact of production cost variance on the profitability levels of

Agali Awamu Women’s Development Group.

To evaluate the effectiveness and appropriateness of the production cost variance

controls used by Agali Awamu Women’s Development Group.

To establish the relationship between production costs variance and the

profitability levels in relation to Agali Awamu Women’s Development Group.

1.5 RESEARCH QUESTIONS What are the production cost variance controls in place used by Agali Awamu

Women’s Development Group?

3

What are the profitability levels of Agali Awamu Women’s Development Group?

What is the relationship between production cost variance and the profitability

levels?

1.6 SCOPE OF THE STUDY

1.6.1 Subject ScopeThe study was carried out on the profitability information and the production cost

variance information as applied to Agali Awamu Women’s Development Group,

covering the period between the years 2007 – 2010.

1.6.2 Geographical ScopeThe research was carried out in Wakiso district, Nansana Town council, in Naluvule

village where the poultry project of Agali Awamu Women’s Development Group is

located.

1.6.3 Time ScopeThe research covered production costs and profitability records of the group covering the

period from 2007 to 2010.

1.7 SIGNIFICANCE OF THE STUDY This research will help the members of the group to appreciate the benefits of

applying proper cost variance control systems.

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The research will also help Agali Awamu Women’s Development Group to

identify the value of their products through setting realistic product prices able to

cover costs and also maximize profitability.

The research will be used by other researchers in similar fields of study as

reference and also as a guide to their work.

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CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 INTRODUCTIONThis chapter shows what other researchers have contributed towards the variables

under study. Production cost variance and profitability, cost accounting and decision

making. It also explains in detail the concept of production cost variance and decision

making and its effect on the profitability levels as indicated by some existing

literature by several writers of outstanding position as far as production cost variance

and profitability is concerned.

Lucey,(2004) stated that it is important that the management of the organization is

informed of any variance in the production costs, and it is therefore the management

accountant’s responsibility to deal with such variances so that the profits of the

organization are not frustrated.

2.2 PRODUCTION COST VARIANCE

2.2.1 Definition of production cost varianceThis is defined as the difference between the standard costs of the product or service

or operation, produced or performed by the normal methods and the standard cost of a

product or operation produced or performed by the alternative method actually

employed. (Arora 2004)

According to Collin Drury, (1998), production cost variance is defined as the

divergence between the actual costs incurred and the standard or estimated costs for a

given product or operation.

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The above definition can as well be expressed in the flow diagram below:-

Diagram 1: showing the flow of production cost variance

Source: Muyego, (2009)

According to Muyego, (2009), prior to the production period, the management usually

sets planned or budgeted costs for the operations. However due to the uncertainties in the

production environment, the production costs tent to be higher than the budgeted costs.

Given the budgeted costs, the profits are usually high however; these are eroded by the

increase in the production costs. The upward arrow shows the high profit expectation and

the downward arrow shows the reduced actual profits realized.

2.2.2 Types of cost variancesHorngren et al (1999) stated that cost variance occurs to all firms that engage in the

production of goods and services. He also asserted that the variation in costs is highly

influenced by the product design, quality of material in puts and the expertise of labour

used in the production process. Cost variances are categorized in to two broad types:-

Production costs

Budgeted Production Costs UGX.2Million

Actual Production Costs UGX.2.8Million

Actual Profits UGX.0.95Million

Budgeted Profits UGX.1 Million

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Favourable and unfavourable variances

A favourable variance occurs when the actual cost is less than the standard costs.

Favourable variance can also be referred to as Credit Variance.

Unfavourable /adverse/debit variance is where the actual cost is more than the standard

cost. The difference between the actual and standard costs can therefore be either positive

or negative.

Controllable and uncontrollable variances

A controllable variance is one that can be regarded as the responsibility of a particular

person or cost center. With the result that his/her/its degree of efficiency can be reflected

in its size. However, if a variance occurs due to certain factors that are beyond the

management’s control, then it is known as uncontrollable variance.

2.2.3 Forms of cost varianceCost variance occurs in a number of elements which include; material variance, labour

variance, overhead variance, and sales variance. However, for the purpose of this study,

emphasis will be on materials, labour, and sales variances.

2.2.3. (i) Materials varianceThis includes divergences from the expected material costs, quality and quantity, price

and mix as explained below:-

Material cost variance

This arises when the actual cost of direct materials used from the standard cost of the

direct materials specified for the output achieved. According to Arora (2006) material

8

cost variance is the difference between the standard cost of output and the actual costs

incurred.

Material price variance

This is the portion of material cost variance which is due to the difference between the

standard price and the actual price paid for the materials. According to Arora (2006)

material price variance is the product of the actual quantity produced given the difference

between the standard price and the actual price.

Material quantity/usage variance

According to Arora (2006) it is the portion of the material costs variance which is due to

the difference between the standard quantity specified and the actual quantity used. It is

derived as a product of the standard price given the difference between the standard

quantity for the actual output and the actual quantity of the materials used.

Materials mix variance

This is a portion of the material usage variance which is due to the difference between the

standard and actual composition of the materials.

Objectives of material cost variance control

To ensure that material costs do not increase unnecessarily which factor

may erode the profits.

To reduce any cases of material wastages and redundancy thus

maximizing output at minimized costs.

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2.2.3. (ii) Labour variancesThis composes of changes in labour costs, rates of payment, efficiency, idle time, yield,

among others. However, for the purpose of this study, the researcher will focus on the

following:-

Labour cost variance

This is the difference between the standard direct labour costs specified for the activity

achieved and the actual direct labour costs incurred. It is expressed as the difference

between the standard labour costs of the actual output and the actual cost of labour.

Labour rate variance

This results as a portion of labour cost variance which is due to the difference between

the standard rate specified and the actual rate paid. Arora (2006) expresses this variance

as a product of the actual labour hours and the given difference between the standard rate

and the actual rate.

Labour efficiency/Time variance

This is that portion of the labour cost variance which is due to the difference between the

labour hours specified or the actual output and actual labour hours expected. It is also

expressed as the product of the standard rate given the difference between the actual

hours spent on work by labour.

Relationship between Labour variance and profitability

Labour is one of the most important factors that enable the production of final goods and

services. However, it is also worth noting that labour is one of the hardest resources to

10

manage and satisfy, labour variances as witnessed in terms of hours spent on work, yield

and quality easily affects the level of output in terms of volume and quality. This affects

the selling price of the commodity, its demand and ultimately the profits to be made.

2.2.3. (iii) sales variance

Its subcomponents include; sales value, volume, price, mix, and sales quantity variance

but for the purpose of this study, the researcher will concentrate on the following.

Sales volume variance

This refers to the number of physical units sold. It represents that portion of the sales

value which is due to the difference between the actual volume and the standard volume

of sales.

Sales price variance

This is the portion of the sales value variance due to the difference between the standard

price and the actual price charged. It is also expressed as the product of the actual

quantity sold at the prevailing prices and the given difference between the actual price

and the standard price.

Sales Quantity variance

Here the variance is the difference between the budgeted sales and revised standard sales.

Revised standard sales quantity means the actual sales quantity in budgeted ratio

products. It is also expressed as the product of the standard price before the quantity is

sold and the given difference between the revised standard quantity and the budgeted

quantity.

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Relationship between sales variance and profitability

The only way through which a producing firm can realize its profitability is through

making sales. Firms without a market to sell to are as good as nonexistent, therefore, the

sales volume of any firm do not need to be frustrated in any way. Sales are made out of

the selling price that is set at the initial stages of production.

Selling prices have got a component of cost and profitability included with in it and thus

a direct effect on the profits of the firm.

2.2.4 Cost variance and standard costing and budgetary controlIt is worth noting that standard costs are set assuming static conditions of operation which

in actual sense do not exist. Budgets on the other hand are also prepared basing on

estimated futuristic costs which are subject to changes in the nearest future. Cost variance

therefore exists in both aspects and therefore changes in estimated costs affect the returns

expected.

2.3 Cost variance and decision makingRobbing et al (1987) defined decision making as a process of choosing the most feasible

alternatives amongst a variety of alternatives. He further asserts that decision making is a

comprehensive process not just a simple act of choosing among alternatives and everyone

in the organization ought to be involved in decision making. But the decision making

process is part of the core functions of any manager; this explains why managers when

planning, organizing, leading and controlling are frequently called decision makers.

Drucker (1999) stated that the most sources of mistakes in management decision are the

emphasis in finding the right answer rather than the question. If both the conditions of the

12

situations and the requirements that the answer has to satisfy are know and simple,

problem solving becomes much easier.

Cost variance on the other affects decision making in a way that, the decisions made

when the expected profits are high are affected by the actual low returns when the

increased costs erode away part of the profits.

2.4 ProfitabilityHerman et al (2000) elicits that two primary objectives of every business are solvency

and profitability. Solvency is the ability to pay debts as they become due. Profitability is

the ability to generate income. Unless a business can produce satisfactory income, and

pay its debts as they come due, other objectives that the firm may have will never be

realized simply because the business will not survive.

Glautier et al (2001) defined profitability of a firm both to share holders and managers

are summarized in the valuation of that firm, indeed the basic objective of measurement

of profitability is to provide valuation of the firm which will be a critical assessment of its

worth as an investment. In effect, the valuation of the firm may be stated as being the

present value of its future cash flows. It is clear that if valuation is to serve a useful

purpose for making investment decisions, accounting information should be reasonably

predictive of the future profitability.

2.4.1 Profitability Analysis Break - even analysis and cost - volume- profit analysis (C.V.P)

13

Since Break even studies show the effect of the changes in costs and the production

quantities on the future profits of the firm. Cost volume profit analysis is further used to

explain the relationship amongst the three variables; - cost, volume, and profitability.

Break even analysis is more concerned with the determining of the level of production

and sales at the point where there is neither a profit nor a loss.

2.4.2 Cost information and profit settingCost information as provided by the cost information system will help in setting the

selling price for the final product or service. The price set will incorporate the unit cost

and the mark up or profit margin. However, the challenge usually lies with the complete

absorption costs incurred which is usually inadequately done. The cost information

system will thus provide the necessary information that will be used in ascertaining costs

and ultimately realizing the relationship that an increase in the production costs reduces

on the level of output creating a scarcity that leads to increased prices. The high prices

affect the level of demand and sales respectively which ultimately affects the level of the

profits realized.

2.5 Cost variance in relation to profitabilityThrough the cost information system, the relationship between cost – volume – and

profits is established. It shows that the cost of producing a single unit of a product highly

determines its selling price. (Kamukama, 2006). Since the selling price is a function of

the unit cost and the markup, it thus shows that the cost element especially when it keeps

on changing, affects the volume of sales and the profits realized ultimately.

Worth noting is that firms usually set their target costs and profits for a given period

however, the changes in the macro environment makes it practically difficult to attain

14

such targets set. Variances in costs of production reduce on the would be output and

therefore the sales are also affected as well as the profits realized from the sales made.

Therefore, any variance in the production costs given the above analysis greatly affects

the profits either positively or negatively depending on the direction of variance.

In conclusion however, it should be noted that cost variance information is very crucial to

management for decision making. In fact, it is a fundamental nutrient for internal

decision making for without such information; it is difficult to measure what price the

firm should exactly sell its product or service. And also if the information is available but

inadequate, the selling price conclusions that will be made will also be insufficient.

Managers should therefore always strive to ascertain all the variances that may occur in

the production costs not undermining their magnitude, however small it may be for such

cost changes ultimately affect the profitability of the firm.

2.6 Small scale production and private sector developmentKalibala, (1994) stated that the term “small scale unit” connotes different meanings

depending on the locality and purpose for which a definition is sought. He argued that in

Uganda, a small scale unit is defined as one employing a capital investment not

exceeding US$ 100 000.

However, according to ACCORD/UGADEV survey (1998), units can be categorized to

capital as cottage; very small with less than US$100 000. Small scale with US$ 10 000 to

US$ 100 000 and medium scale with US$ 100 000 to US$ 300 000 employed capital.

Kibera, (2000) defined small scale businesses as those that employ in between 5 to 200

employees. In Uganda most businesses are generally small scale thus explaining the big

15

size of the private sector. As an effort of the government to induce development and self

sustaining economy in Uganda, it embarked on private sector development efforts,

starting way back in 1994. This effort has induced the rise of small scale enterprises in

very many parts of the country.

Agali Awamu Women’s Development Group has not been an exception to this wave of

private sector development. It has been in existence for ten years now. The group deals in

poultry farming on a small scale, the group comprises of 50 members who are actually

the employees of the group.

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CHAPTER THREE

3.0 METHODOLOGY

3.1 INTRODUCTIONThis section presents the methods the researcher will use for the study. It consists of the

research design, survey population, sample size, research procedure, sampling design and

techniques, data collection methods, and instruments and data processing analysis.

3.2 RESEARCH DESIGNThe research was associational in nature since it sought to give more insight into the

relationship between production cost variance and profitability levels. A focused

discussion was conducted to collect both qualitative and quantitative data.

3.3 SAMPLING DESIGNThe study population focused on the top administration of the Women’s Development

Group under study. This was due to the fact that it is the top administration that makes

decisions concerning price setting, material sourcing, standard cost setting and marketing

strategies to be used.

A total of 37 respondents were selected because they would provide reliable information

on production cost variance and profitability.

3.3.1 Sample sizeFor the purpose of the research, the researcher used an estimated sample size of 37

people, however due to the problems of non respondence; only 37 questionnaires were

fully answered and returned to the researcher. The distribution of the respondents were as

follows;-

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Table 2: Showing the distribution of the sample size for the research.

Department of participation Number of respondents Percentage

Administration 5 13.5%

Accounting and finance 5 13.5%

Sales and marketing 10 27%

Material input sourcing 7 18.9%

Production department 10 27%

Total 37 100%

Source: Primary (Members of Agali Awamu Women’s Development Group)

3.3.2 Sampling ProcedureSimple random sampling is one of the sampling procedures that the researcher used when

collecting data especially among the group members/workers. Purposive sampling was

also used especially with the group administrators and finally the researcher was able to

draw general conclusions in respect to all poultry farmers.

3.4 DATA COLLECTION METHODS

3.4.1 Primary dataThe researcher intended to collect data using questionnaires, which were sent ro Agali

Awamu Women’s Development Group concerning how they manage the variance in the

production costs, the researcher administered some of the questionnaires and others were

collected after a period one week. The feedback was used to analyze the findings.

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Data was collected from 37 respondents, the researcher used the likert scale that had

preferences like strongly agree, agree not sure, disagree, and strongly disagree. And for

each response to each question, a box was provided for the respondents to tick.

The questionnaires were designed to capture, concise, and precise information concerning

the production cost variance and the profit levels. Questionnaires also had structured

questions that were to expose the respondent’s opinion towards the variables under study.

To collect primary information still, the researcher used interview guides to administer

interviews to some of the group members that were purposively selected. The interview

was divided into parts concerning materials, labour, and sales variances.

3.4.2 Secondary dataThe researcher collected information from the cost information papers kept by the

group’s accounts and finance section. The information availed included, that concerning

production costs, selling price setting and profitability of the group for the last four years

2007 – 2010.

3.4.3 Data collection methodsQuestionnaires

The researcher used self administered questionnaires to collect date from the field. This

would serve convenient for the researcher.

Interview

This was a face to face interaction where by the researcher arranged the interview guide

in relation to production cost variance and profitability.

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Procedure

The researcher began the study by getting a letter of introduction from Makerere

University, college of distance learning and continued education which was attached to

the questionnaire. This intended to minimize the resistance of some hostile respondents

who may have refused to render information to the researcher. The questionnaires were

distributed to the respondents and later collected. The correctly answered questionnaires

were sorted and considered as having adequate data qualifying for analysis.

3.5 DATA PROCESSING, ANALYSIS AND PRESENTATION

3.5.1 Data ProcessingAfter collecting data, the researcher organized the well filled questionnaires and

processed data as well as editing with the aid of Micro soft word especially typing the

work on the computer. The researcher also used Microsoft excel to analyze the

relationship between he variables and also to draw the graphs.

3.5.2 Data analysisData was collected, results compiled, sorted, classified and analyzed using frequency

tables, percentages, regression analysis, this helped the researcher to establish the

relationship between production cost variance and profitability.

3.5.3 Data presentationData was presented in tabular form with frequencies and percentages for simpler

classification of responses. The researcher also used a number of graphs for easy data

interpretation for the users due to the visual appeal.

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3.5.4 Difficulties encountered during the study There was general absenture of recorded information concerning production costs

and sales.

There was non repondence in some of the questionnaires where by at least one or

two questions would be left out on average.

Some of the members were not literate and administering the questionnaires from

one member to another was time consuming.

The study was costly in terms of printing, transport, binding, and meals.

21

CHAPTER FOUR

4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS.

4.1 INTRODUCTIONThe purpose of this study was to determine whether Agali Awamu women’s group has an

effective cost variance control system in place to help it to realize its profits accurately

and therefore compete favorably. This chapter presents the findings of the study in

reference to the research objectives and questions that were presented and examine in

chapter one. Findings were based on a total 37 respondents. Worthy noting here is that 40

questionnaires were issued out in total to respondents however, cases of non respondence

in three questionnaires were registered.

Questionnaires were administered to some of the Group members taking any position

with in the Group. On the other hand, interviews were carried out on a few top leaders of

the group purposely due to the comprehensive information they had concerning the

Group’s performance in all aspects.

4.2 Results from section one of the questionnaire concerning the respondents’ personal information

Table 3: Showing the gender distribution of the respondents

Gender Frequency Percentage

Female 30 81%

Male 7 18.9%

Total 37 100%

Source: Primary

22

Graph 1

The group under study is a women’s development group, this is justified by the largest

percentage of females 81%. Research shows that also men are included in this group for

the purpose of assisting the women in heavy tasks like mixing the chicken feeds and

cleaning the chicken houses. Men are also included in the accounting and administration

sections, due to their outstanding knowledge in such activities. This information is still

represented in the table and graph above.

Table 4: showing the ages of the respondentsAge Bracket Frequency Percentage

16-30 4 10.80%

31-40 16 43.20%

41-50 14 37.80%

50+ 3 8.10%

Total 37 100%

23

Graph 2

Source: Primary

Majority of the group members are with in the age bracket of 31 – 40 years. This is

represented by 43.2%. This is followed by members with in the age bracket of 14 – 50

years represented by 37.8%. Those with in the age bracket of 16 – 30, and 50+ have the

least percentages as shown by 10.8% and 8.1% respectively.

The ages of the majority members indicate the most productive stage of an individual and

thus can ably work with in the group despite it tedious work. Those with in the age

bracket of 50+ are maintained with in the group as valuable assets due to their long term

experience they have in this business. On the other hand, the members with in the age

bracket of 16 – 30 are at times treated as casual workers of the group, and are used to do

24

the heavier tasks on the farm. The same information can be illustrated on a graph and

table as shown above.

Table 5: Showing the level of experience that group members have in the poultry business.

Time Period Frequency Percentage

less than 1 year 7 18.90%

1 - 3 years 12 32.40%

4 - 6 years 12 32.40%

6 years and above 6 16.20%

Total 37 100%

Graph 3

Source: Primary

25

Majority of the members have experience ranging in between 1 – 6 years. This is

represented by a percentage of 32.4%. They are followed by those that are less than one

year with 18.9%, and lastly with those with experience above 6 years are only 16.2%.

The trend is more so explained by the ages of the respondents with in which age brackets,

they cannot be very experienced. Worthy noting is that according to the research, it was

found out that the few members that have experience above 6 years are not necessarily

those above 50 years but also include those who are younger but have been doing poultry

farming on a domestic scale and have thus gained recommendable experience. The

experience of the members can also be illustrated using the graph and table above.

Table 6: Showing the positions held by respondents with in the group.

Position Frequency Percentage

Administrator 5 13.50%

Accounts and finance 5 13.50%

Sales and Marketing 10 27%

Material sourcing 8 21.60%

Production 9 4.30%

Total 37 100%

Graph 4

26

The Group has employed most of its members in sales and marketing as evidenced by

27% coverage. This is due to the need for the Group to widen its market base so as to

increase on its profitability. Findings show that the production section is the second

largest with 24.3%. Research justified this percentage as a result of the numerous

activities that take place during production, the activities included, mixing the chicken

feeds, feeding the chicken, and cleaning the chicken houses especially at the end of the

rearing season. Materials sourcing follows with 21.6%, the findings show that to avail the

chicken feeds it does not require so many people but only a few of them but with out

standing experience, as well as good customer – supplier relations that can improve the

bargaining power of the Group when sourcing the necessary materials. The same

information can illustrated using the table and graph above.

4.2.1 Responses from section two of the questionnaire concerning the Extent to which production costs are monitored through record keeping.

Table7: Showing the response on whether all information concerning costs is recorded.

Response Frequency Percentage

27

Yes 19 51.40%

No 8 21.60%

Not sure 10 27%

Total 37 100%

Source: Primary

Graph 5

Findings showed that at least more than a half of the cost information is recorded as

represented by a percentage of 51.4%. Only 21.6% of the cost information is not

recorded, and 27% of the respondents were not sure if all the cost information in the farm

was recorded. Research also showed that the group incurs some marginal costs that may

not necessarily be included in the group budget and such costs such as paying casual

28

laborers for the day’s work seriously erode into the group’s would be profits. The graph

below gives a visual impression of the above situation:-

Table 8: Showing the Response on the completeness of the cost information recorded

Response Frequency Percentage

Complete 12 44.40%

Incomplete 15 55.60%

Not at all 0 0%

Total 27 100%

Source: Primary

Graph 6

Source: Primary

Findings show that this particular question registered a lot of non respondence, where by

10 respondents skipped it. This is clear indicator that not all the cost information is

completely recorded. Otherwise, 55.6% of the cost information is recorded incompletely

and only 44.4% of the cost information is completely recorded. This is an indicator of

poor control over the production costs since some of these costs are left to go unnoticed.

The above information is also represented on the graph table above.

29

Table 9: Showing the responses towards the various documents used to record cost information.

Response Frequency Percentage

Cash Book 6 16.20%

Information papers 20 54%

cost record book 9 24.30%

Not at all 2 5.40%

Total 37 100%

Source: Primary

54% of the cost information is recorded on cost information papers, 24.3% of the cost

information is recorded in cost record books, 16.2% of the cost information is recorded in

the cash book, and 5.5% of the cost information is not recorded any where. The findings

show that the cost information papers can be easily lost or misplaced thus the cost

information for the period may be lost and accounting for costs becomes a lot more

difficult. This question justifies the incomplete information kept by the group. The graph

below also explains the above information.

Graph 7

30

4.2.2 Responses from section three of the questionnaire concerning the evidence of the occurrence of Variance in Production Costs.

Table 10: Showing response on whether there is an existing mechanism to control cost variance.

Response Frequency Percentage

Yes 20 54%

No 12 32.40%

Not sure 5 13.50%

Total 37 100%

Source: Primary

Respondents accepted that there are different means in place to help in controlling the

variance in production costs and this is evidenced by a 54%. 32.4% of the respondents do

accept that there are no such controls for costs. Findings justifying this response show

that as mere farmers they do not have the authority over the increasing fuel prices and the

harsh weather conditions thus they did not believe that there could be a cost variance

control system. 13.5% of the respondents show that they are not sure if there exists accost

control system or not. The graph below explains the above information more clearly:-

31

Graph 8

Table 11: showing the responses on the frequency of existence of production cost variance.

Response Frequency Percentage

Daily 7 18.90%

Week 8 21.60%

Monthly 22 59.50%

Annually 0 0%

Total 37 100%

Source: Primary

Findings showed that on a monthly basis, production costs do fluctuate and this is

evidenced by 59.5% of the respondents. 21.6% o the respondents accepted that

production costs vary on a weekly basis, and 18.9% of the respondents showed that the

production costs vary on a daily basis. The above information is again summarized using

the graph below:-

Graph 9

32

Source: Primary

Table 12: Showing the response on whether the group sets standard costs and expected profits.

Response Frequency Percentage

Yes 21 56.70%

No 6 16.20%

Not Sure 10 27%

Total 37 100%

Source: Primary

Graph 10

33

Source: Primary

Research findings showed that 56.7% of the respondents accept that standard costs and

profits are set prior to the production season. As farmers in the poultry business, they do

plan for the profits to be made and the costs to be incurred. 16.2% of the respondents

accept that there are no such settings for the profits and costs since research shows that

these respondents acknowledge the fact that the group is surviving in an environment full

of uncertainties. 27% of the respondents on the other hand are not sure whether standard

costs and profits are set. The graph below further explains the above information.

Table 13: Showing the response on the methods used by the group when setting

standard costs.

Response Frequency Percentage

Historical information 20 54%

Calculation 5 13.50%

Market Research 12 32.40%

34

Total 37 100%

Graph 11

Source: Primary

Historical information is the commonest method based on by the group’s management

when setting the standard costs; this is represented by 54% of the total respondents.

32.4% of the total respondents showed that market research is done when setting the

standard costs. Calculating and deriving the standard costs using tables and formulas are

used at a rate of 13.5%. The above information can still be presented on a graph and table

as above.

Table 14: Showing the response on the criteria used by the group when setting the selling price for their products.

Response Frequency Percentage

35

Cost plus mark up 3 8.10%

Total cost divide by Total out put 15 40.50%

Price takers 6 16.20%

Personal judgment 13 35.10%Total 37 100%

Source: Primary

The group sets the selling price for the products by simply dividing the total production

costs among the number of unit produced and then finally adding a mark up. This is

evidenced by 40.5% of the respondents agreeing to that fact. 35.1% of the respondents

accepted that the firm uses personal judgments to set the prices. 16.2% of the respondents

accepted that the group is a price taker, given the fact that it produces on a small scale,

the more established poultry farmers set the price that the group finally also adopts.8.1%

of the respondents showed that the group at a times uses cost plus mark up method, when

setting the unit selling prices of their products. This information is also represented on the

graph below:-

Graph 12

36

Source: Primary

4.2.4 Responses from section four of the questionnaire concerning the Effects of Cost Variance on the profitability of the group.

Table 15: Showing the responses on the occurrence of Production Cost Variance.

Response Frequency Percentage

Strongly Agree 20 54%

Agree 12 32.40%

Not sure 0 0%

Disagree 3 8.10%

Strongly disagree 2 5.40%

Total 37 100%

Source: Primary

Majority of the respondents strongly agreed to the presence of production cost variance.

This was justified by a percentage of 54% of the total respondents. 32.4% of the

37

respondents still agreed to the same fact 8.1% disagreed with the fact and 5.4% strongly

disagreed with the fact. The graph below also shows the responses on occurrence of cost

variance.

Graph 13

Table 16: Showing the responses on the existence of a cost variance control system

in the group.

Response Frequency Percentage

Strongly Agree 2 5.40%

Agree 22 59.50%

Not sure 9 24.30%

Disagree 4 10.80%

Strongly Disagree 0 0%

Total 37 100%

Source: Primary

Graph 14

38

Source: Primary

Majority of the respondents were found out to by agreeing to the fact that there is an

effective cost control system in place .this is justified by 59.5% of the total

respondents.24.3% of the total respondents were not sure of the existence of such a

system, 10.8% disagree to the fact, 5.4% of the respondents strongly disagreed with the

fact and none of them strongly disagreed to the fact. The same findings were further

summarized into the graph table above.

39

Table 17: Showing the responses on the Effect of Production Cost Variance and the Profitability of the group.

Response Frequency Percentage

Strongly Agree 13 35.10%

Agree 19 51.10%

Not sure 3 8.10%

Disagree 1 2.70%

Strongly disagree 1 2.70%

Total 37 100%

Source: Primary

51.1% of the total respondents agreed to the fact that production cost variance has got a

significant effect on the profits of the group. 35.1% strongly agreed to the above fact,

2.7% disagreed and strongly disagreed about the above fact while 8.1% were not sure if

such an effect does exist. The similar information is summarized in the graph below:

Graph 15

Source: Primary

40

Table 18: Showing the response on the effect of inadequate information on cos ascertainment and profits of the group.

Response Frequency percentage

Strongly Agree 9 24.30%

Agree 16 43.20%

Not sure 3 8.10%

Disagree 7 18.90%

Strongly disagree 2 5.40%

Total 37 100%

Source: Primary

Of the total number of respondents, 43.2% agreed with the fact that inadequate

information affects the ascertaining costs and profits of the group. 24.2% of the

respondents also strongly agreed to the above fact. On the other hand, 18.9% of the

respondents disagreed with the fact, 8.1% were not sure of the relation ship while 5.4%

strongly disagreed to the matter. The information can also be summarized using a graph

as below:-

Graph 16

Sources: Primary

41

4.2.3 Responses from the fifth section of the questionnaire concerning the Analysis of Profitability and counter practices on cost variance.(I) Other factors affecting price setting decisions besides cost variance information.

Finding from the research were that, the pricing decisions of the group are not only

affected by the cost variance information but also by many other factors which are

explained below:-

The size of the market and the level of demand as influenced by the level of the

consumers’ disposable incomes and willingness to buy. According to the research, this

factor is boosted by limited number of distribution channels which are mainly to

domestic consumers, retail shops and a few primary schools around.

The unfavorable changes in the climatic conditions which create a scarcity in the supply

of the core farm in puts: - maize brand, the long dry periods are also associated with

water scarcity yet the birds need a lot of drinking water. The production costs are further

increased more so when the water is to be bought from the water vendors.

The group also considers the target profit for the period and thus tries to set a profit

maximizing price for the farm produce.

Decisions taken by other competing poultry framers force the group to either lower their

prices or simply take on the price used by the competitors so as to compete favorably.

42

(ii). Other factors that affect the levels of profitability of the group apart from

cost variance.

Findings from the research show that factors that affect the price setting decisions of the

group, will still have a direct effect on the profits of the group due to the fact that price

contains a component of profit imposed into it:-

The harsh climatic conditions which increase on the labor costs especially the casual

laborers that are employed to fetch water for the birds. The long dry spells create a

scarcity of wild grasses which are a good substitute for maize brand via feeding the

chicken, when these grasses are used; they reduce on the cost of feeding the chicken at

least for a short while.

Emphasis was still put on the limited size of the market that consumes the products of the

group. The market is still very small yet the competition is too stiff, a small market

implies smaller sales and thus low profitability realized.

(iii). Safe guards put in place to counteract the effects of production cost

variance.

Buying the chicken feeds in bulk when the prices are still affordable. This reduces on the

exposure of the farmers to buying feeds at a higher price in future. However, bulk

purchases come with storage costs which are usually also very high, like, reserving a big

room well aerated and spreading the chicken feeds on the floor.

Maintaining a strong customer – supplier relations. With such established relationships,

the farmers can still get chicken feeds at a discount and also they can get the chicken

feeds on credit basis.

43

The group also tries to reduce on the cost increase impact by feeding the chicken on

alternative cheaper feeds like grasses, sliced banana peels; however, this can only apply

in the wet seasons. Since July (2010), the climatic conditions were very harsh with long

dry spells, this rendered the solution unviable.

4.3 RESPONSES FROM THE INTERVIEW GUIDE USED TO COLLECT INFORMATIONAn interview was done by the researcher and it was guided by an interview guide. The

interviews were held on a purposive basis where by only three respondents were

interviewed:- among the respondents were, Mr. Sentongo Eridad Mukasa, who works the

material sourcing section, Mrs. Semata Hellen, who is a administrator in the group, and

M/s Nabadda Jackline who works in the accounts and finance section.

The interview guide was categorized into four sections of questions:- materials, labor,

sales and profit variance and the findings were as follows:-

Response on cost and profit variance

To the respondents, profit is the ability to remain in business and also to see that the

chicken can cover their costs of feeding, yet at the same time, when you subtract the total

expenses from the total earnings, they leave some amount behind to be shared by the

group members and that is profit.

Cost variance on the other hand, to the respondents means an instance where by one

purchases something at a higher price or even a lower price than what he/she expected to

spend. They give an example of the variance in the price of maize brand where by in June

2010 it cost between 450 – 500 shillings per kilogram but of recent, it costs between 600

– 700 shillings per kilogram hence a variance in costs.

44

Response on the extent to which a member is responsible for the variance in costs

and profits.

The respondents held that a member is only responsible if she/he causes a loss out of

negligence, for example if one leaves the chicken house unlocked and the birds are

stolen, or if one mishandles the eggs and breaks them. This loss is incorporated in the

person’s share of profits. However, to the greater extent, the factor of increasing costs id

usually beyond the members’ control since they do not influence the pricing of fuel

which ultimately leads to the increase in production costs.

Response on material inputs Variance.

The respondents reported that, they try to at least source chicken feeds from the best

supplier for quality reasons. They also take part in the mixing of the chicken feeds to

ensure the right nutrients for the chicken. They also use experienced members who can

buy the right quantity at a reasonable price.

Material costs were seen to be changing on a bi – weekly basis; however, the group

purchases the feeds on a monthly basis.

The causes of the changes in the material costs were attributed to the long dry season

which affected the supply of maize and ultimately affected the supply of maize brand.

The situation was worsened by the increased exportation of maize grains to neighboring

countries such as Kenya, Tanzania and in Juba- southern Sudan since 2007/2008 to date.

A few mechanisms have been put into place to reduce on the costs of feeding the birds,

these include: - minimizing wastage of the feeds by giving the birds the exact amount

they can finish. The feeds that would have been wastage are reserved for the following

day.

45

Response on labor in put cost variance.

The respondents held that they mainly use semi skilled and unskilled labor; however,

they cherish the experience one may possess in poultry farming practices.

In the group, labor is motivated by giving members timely shares in profits, allowing

them an advance payment when they are in a financial crisis and some ties allowing them

to consume some of the damaged eggs.

In the Group, labor performance is hardly measured, since most of them work together in

a collective manner and all they want is to see a task accomplished with in the given

period of time, for example, mixing the chicken feeds should not take more than one day.

The group rarely faces instances where workers demand arise in payments, this is

because, the core members know when they receive their shares and the amount of their

share depends on the profits made within the season, for the casual workers, they a paid

within a fixed range of 2000 – 5000 shillings a day.

Response on Sales Variance.

According to the respondents, when the birds begin laying eggs, the group can sell ib

between 350 – 500 eggs per month. And at the end of the rearing season, they sell of the

birds as off layers.

The group bases on their available market share as well as on their hope to get new

customers that they can set their target sales.

The group market share is small, just within a few retail shops, domestic consumers, and

some primary schools that buy eggs to feed their pupils once in a while.

46

4.4 ESTABLISHING THE RELATION SHIP BETWEEN PRODUCTIONS COST ARIANCE AND PROFITABLITY LEVELS

Pearson correlation coefficient

N X Y

1 20 13 400 169 260 12.6 5.6

2 12 19 144 361 228 11.20315 19

3 0 3 0 9 0 0 3

4 3 1 9 1 3 2.203152 1

5 2 1 4 1 2 2 1

Total 37 37 557 541 493 28.0063 29.6

Average 7.4 7.4 111.4 108.2 98.6 5.601261 5.92

Where by:-

N - Is the frequency of response

X - Is the independent variable

Y - Is the dependent variable

Where by:-

a - is the y intercept.

b – Is the gradient of the variables.

47

The value of y therefore is:

The correlation Analysis

48

The relationship was computed using Pearson correlation and figures were collected on

the cost variance and the profitability levels. The results indicated a magnitude of 0.57.

This implies that there is a positive and significant relationship between the production

cost variance and the profitability levels.

49

CHAPTER FIVE

5.0 DISCUSSION, CONCLUSION, RECOMMENDATION AND SUGGESTION FOR FURTHER RESEARCH.

5.1 INTRODUCTIONThe proceedings in the previous chapters have laid a firm foundation upon which the

researcher can draw summary, conclusion, recommendation and suggestion for further

studies or research.

The study sought to establish the relationship between the variance in production costs

and the level of profitability among the small scale poultry farmers. The researcher

achieved this through the use of questionnaires, interview guides, and interactive

conversations. The questionnaires were designed in form of questions which were

directed towards the research questions that were derived in chapter one. A discussion on

findings, summary, conclusions, recommendations and further research areas are

presented below.

5.2 SUMMARY OF THE MAJOR FINDINGS OF THE STUDY

5.2.1 Findings on the impact of cost variance on the profitability levels of Agali Awamu Women’s Development Group. The research findings established that, there is a strong occurrence of production cost

variance and this has been strongly affected by the inadequate production cost

information kept using information papers which can be easily lost, and thus it becomes

hard to ascertain and monitor production costs.

According to the findings, production cost variance has had a negative impact on the

profits of the Group. A good percentage of the respondents agree to the same fact that the

variance in production costs has eroded most of the group’s profits.

50

The variance in production costs has had unfavorable impacts on the profitability of the

group, this is in agreement with Arora, (2006) who held that adverse variance which comes

with the unfavorable changes between the budgeted and actual costs negatively affects the

profits of the organization.

5.2.2 Findings on evaluating the impact of production cost variance on the profits of Agali Awamu Womens’ Development Group.The findings show that the group members strongly agree to the negative effect the variance

in production costs has had on the group’s overall profits. Half of the group strongly agreed

to the fact that the profits of the group have been significantly eroded with the adverse

increase in the production costs. This has been evidently tracked for the last four years.

According to the research findings, the profit share for most of the members has been greatly

reduced, and this has been attributed to the constant rise in the input prices causing a

divergence of the actual costs and the planned/budgeted costs.

5.2.3 Findings on the effectiveness and appropriateness of the cost variance controls used by Agali Awamu Womens’ Development Group.Research findings showed that the Group had tried out a number of controls to counter

the variance in production cost. Most of the controls in place are practical and can easily

be applied by any individual.

Findings shoe that the Group uses measures like buying the chicken feeds in bulk at a

lower cost, however according to Lucey, (1996) who held that bulk purchases are among

the causes of inventory and its associated costs. However, according to the Daily Monitor

of Wednesday 26th January 2011, Mr. Aga Sekalala, the managing director of Uga chick,

showed that over stocking the chicken feeds, makes the feeds to lose the nutrients and

51

thus the poor productivity of the birds, therefore, with such a factor, it renders the above

mechanism in appropriate.

According to the findings, the group also occasionally feeds the chicken on wild grasses

and banana peels as food so as to save the costs of buying maize brand. However, this

measure only applies in periods of wet seasons, given the unpredictable climate of late

characterized with long dry spells, such a measure becomes a solution to cost variance

but insufficient.

The group was also found out to be using the strong customer – supplier relationships as

a safeguard against the variance in costs. This creates customer loyalty and thus

customers can access the feeds at discounts, on credit arrangements, and also still it was

found out that because of such relationships the group stands a better bargaining position

when buying the chicken feeds and other material in puts.

5.2.3 Findings on the relationship between production cost variance and the profitability levels of the group.The findings showed that there existed a positive and significant relationship between the

production cost variance and the profitability of the group. This was established by the

use of Pearson’s correlation coefficient which gave the researcher a magnitude of r =

0.57. This therefore implies that an increase in the production costs will automatically

lead to a reduction in the profit levels of the group. On the other hand, a reduction in the

production costs lead to an increase in the profits of the group. This therefore explains the

research problem in chapter one whereby there was need to establish the reason/ why the

profits of the group were significantly reducing.

52

5.2 CONCLUSIONAccording to the findings in chapter four and in the opening part of chapter five, research

established that Agali Awamu Womens’ Development Group, does not keep adequate

records concerning the cost information, uses historical information when setting the

standard costs and profits, the members have got minimal experience in the poultry

farming business, and most of the safe guards they use to hedge against the variance in

costs are in applicable in some specific conditions.

Findings also led the researcher to conclude that poor cost record keeping is one of the

other reasons that are eroding the profits of the group. This is simply due to the fact that

some costs are not effectively ascertained and they slowly reduce the profits of the group.

Worthy noting however, is that some cost changes have been attributed to the general

economic changes such as increased inflation and unemployment, thus at individual

levels, cost changes arising from such instances cannot be controlled easily.

Findings still responded to the research question regarding whether there exists any

relationship between cost variance and profits of the group. In light of the same question,

it can therefore be concluded that cost variance has negatively affected the profitability

levels of the group, and thus the steady reduction in the annual profits. However, an effort

made towards the improvement on the cost variance hedging performance would highly

improve the performance of the group.

53

5.3 RECOMMENDATIONSThe findings and conclusions in the preceding section of this report inspired the

researcher to strongly recommend the following as worthwhile and paramount to Agali

Awamu Womens’ Development Group.

a. The group should start using futuristic cost information when setting the standard

costs and profits. This is because futuristic costs are relevant costs and can thus

affect or be affected by the decisions made.

b. The group should incorporate the use of experts in poultry farming. This will help

them overcome the bottlenecks that they meet due to their few years of experience

as witnessed in table 4 in chapter four.

c. The group should segregate duties within the accounts and finance section. The

section could be divided into two separate sections: - Accounts section and the

finance section. The accounts section will find it easier to record all the cost

information and also to keep proper records other than the simple cost information

papers used at the present. And the finance section will be more efficient when

allocating resources and distributing profits.

5.4 SUGGESTION IN AREAS OF FURTHER STUDYThe researcher recommends that a study in cost variance in manufacturing firms be

carried out to establish its effect in the industry sector.

The researcher recommends that further research be carried out on the effects cost

variance and decision making in manufacturing firms and service providers.

54

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Publishing House PVT Ltd.

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Bamwine S. (2004) Effect of Materials Management on Profitability, Dissertation

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Drucker P. F. (1999) Management for the future, the 1990s and Beyond, New Delhi Tata

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Drury C. (1998) Management and Cost Accounting, 4th Edition, International Thompson,

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Glautier and Rayburn, (2001) Introduction to Financial Management, 2nd Edition, Great

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Hermanson, Edwards, Rayburn (2000) Financial Accounting, 4th Edition Richard D.

Irwin Incorporated.

Horngren, Towell, Edwards (1999) Management Accounting, 7th Edition, Prentice Hall

Incorporated.

Kalibala J. (1994) 1st Annual International Management Conference, organized by

Makerere University Business School.

Kamukama N. (2006) Cost and Management Accounting 1st Edition Makerere University

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55

Kibera l. (2004) 7th Annual International Management Conference, organized by

Makerere University Business School.

Lucey T. (2004) Costing, 5th Edition, Ashford colour Press Ltd, London.

Muyengo K. F. (2009) Costing Methods and Pricing Decisions, Dissertation submitted to

Makerere University Business School for the award of a Bachelors Degree in Accounting

and finance.

Pandey I. M. (1998) Financial Management. Vikas Publishing House PVT limited 7th

revised edition.

Robbing, Van Horne, Cowell (1987) Foundations of Financial Management, Irwin, Inch.

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Accounting and Finance.

56

APPENDICES

APPENDIX I

MAKERERE UNIVERSITY

COLLEGE OF EDUCATION AND EXTERNAL STUDIES

SCHOOL OF DISTANCE AND LIFELONG LEARNING

RESEAECH QUESTIONNAIRE ON

PRODUCTION COST VARIANCE AND PROFITABILITY LEVELS.Dear respondent, I am a student of Makerere University doing Bachelor of Commerce

(B. Com). I here by present to you this questionnaires with an aim of collecting

information relevant to the above topic under study. This questionnaire has got five brief

questions that requires you to tick in the boxes provided and lastly briefly write your

opinion for the open questions. I therefore humbly request for your coorperation through

answering the questions in this questionnaire, and all your responses will be highly

appreciated.

SECTION ONE:

This section seeks to derive the respondent’s personal information, in terms of sex,

age experience and position held in the group.

1.What position do you hold in this group?

Admnistrator Accountant/Finance officer

Sales and marketing Material input sourcing

Production

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2.Sex

Female Male

3.Age in years

16 -30 31 -40 41 -50 Above 50

4. How many years have you spent in this business?

Less than a year Between 1 – 3 years

Between 4 – 6 years Above 6 years

SECTION TWO

This section seeks to derive information concerning the extent to which production

costs are monitored and recorded.

5. Do you record all the production costs that accrue to this poultry business?

Yes No Not sure

6. If yes, to which extent do you record the costs?

Complete Incomplete Not at al

7. What books of original cost record entry do you use to record costs?

Cash book Cost record books

Cost information papers We do not record at all

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SECTION THREE

Seeks information on the evidence of occurrence of production cost variance.

8. Have you noticed any changes in the costs incurred in production?

Yes No Not sure

9. If yes, how often/frequently do these costs change?

Daily basis Weekly basis

Monthly basis Annual basis

10. Do you set any standard costs and expected profit so as to control the cost changes?

Yes No Not sure

11. How do you set the standard costs and the expected profits?

We use historical information

We calculate and derive it

We do market research

12. What criteria do you use to set the selling price of your products?

We consider costs incurred plus mark up

We divide total costs over the total output

We are price takers

We use personal judgment

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SECTION FOUR

This section seeks information concerning the effect of cost variance on profitability

levels.

13. We are experiencing cost variance in our production processes

Strongly Agree Agree Not sure Disagree Strongly disagree

14. We have an effective cost variance control system in place

Strongly Agree Agree Not sure Disagree Strongly disagree

15. It is because of the changes in the production costs that our profits are reducing.

Strongly Agree Agree Not sure Disagree Strongly disagree

16. It is because of the use of inadequate cost information that cost changes are not

realized well before time that they reduce the profits.

Strongly Agree Agree Not sure Disagree Strongly disagree

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SECTION FIVE

Analysis of the profitability levels and the counter practices on production cost

variance.

17. Identify any other factors that affect price setting decisions besides cost variance

information.

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

18. What other factors affect the level of profitability apart from cost variance?

………………………………………………………………………………………………

………………………………………………………………………………………………

………………………………………………………………………………………………

19. Are there any safeguards in place to reduce on the impact of cost variance on the

profits of the group?

………………………………………………………………………………………………

………………………………………………………………………………………………

20. Explain how the group measures its profits.

………………………………………………………………………………………………

………………………………………………………………………………………………

Thank you for your cooperation

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APPENDIX II

MAKERERE UNIVERSITY

COLLEGE OF EDUCATION AND EXTERNAL STUDIES

SCHOOL OF DISTANCE AND LIFELONG LEARNING

AN INTERVIEW GUIDE FOR THE RESEARCH ON

PRODUCTION COST VARIANCE AND PROFITABILITY LEVELS.

This interview guide is divided into four different section concerning materials, labour,

sales and profit variance.

1. What do you understand by the term cost and profit variance?

2. To what extent are members responsible for the variance in costs and profits?

SECTION ONE

Materials variance

3. How does the group manage the quality and usage of the materials?

4. How often do material costs change?

5. What do you suspect are the causes of the changes in material costs?

6. What have you done to control the material cost variance/

SECTION TWO

Labour variance

7. What kind of labour do you use in the production process?

8. How is labour motivated and remunerated?

9. How is labour performance measured?

10. How often do workers ask for payment increments?

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SECTION THREE

Sales variance

11. How many units do you produce and sell on a monthly basis?

12. What methods do you use to set target sales?

13. How big is the market share for your products?

14. Are there any post production loss controls?

15. How often does the selling [price change to reflect the changes in costs?

SECTION FIVE

Profit variances

16. How often do the actual profits divert from the estimated or budgeted profits?

17. How has the divergence in the profits affected the performance of the group?

18. How often do you pay out or share profits to the group members?

19. Are there any controls in place to monitor the changes in profits?

20. How do you measure the profits of the firm?

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