THE EFFECT OF COST CONTROL ON THE FINANCIAL PERFOMANCE OF

EQUINOX INTERNATIONAL LIMITED

BY

MAYANJA YASINI
REG NO: 212 033021 - 04664

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF BUSINESS FACULTY OF

MANAGEMENT FOR THE PARTIAL FULFILLMENT OF BACHELORS DEGREE IN BUSINESS
STUDIES OF ISLAMIC UNIVERSITY IN UGANDA

March 2015

TABLE OF CONTENTS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study...................................................................................................................
1.2 Problem statement.............................................................................................................................
1.3 Research Objectives...........................................................................................................................
1.3.1 General Objective...........................................................................................................................
1.3.2 Specific Objectives........................................................................................................................
1.4 Research Questions............................................................................................................................
1.5 Significance of the study....................................................................................................................
1.6 Scope of the study..............................................................................................................................
1.7 Conceptual Frame Work....................................................................................................................
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction.......................................................................................................................................
2.1 Cost Control......................................................................................................................................
2.2 Cost Control Applications..................................................................................................................
2.3 Control Reports.................................................................................................................................
2.4 Standards...........................................................................................................................................
2.5 The Role of Accounting.....................................................................................................................
2.6 Data Collection..................................................................................................................................
2.7 Budget and Control Administration...................................................................................................
2.8 Strategic Cost Control........................................................................................................................
2.9 Summary...........................................................................................................................................

CHAPTER THREE
METHODOLOGY
3.0 Introduction.....................................................................................................................................10
3.1 Study Design......................................................................................................................................10
3.2 Data Collection................................................................................................................................
3.6 Research Methods............................................................................................................................
3.7 Data Analysis Methods....................................................................................................................
REFERENCES:.......................................................................................................................................12

CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
This chapter will peruse through the background of the study, the problem statement,
objectives of the study, general objectives and specific ones, research question, the scope
of the study and the importance of the study.
Cost control, also known as cost management or cost containment, is a broad set of cost
accounting methods and management techniques with the common goal of improving business
cost-efficiency by reducing costs, or at least restricting their rate of growth. Businesses use cost
control methods to monitor, evaluate, and ultimately enhance the efficiency of specific areas, such
as departments, divisions, or product lines, within their operations.
During the 1990s cost control initiatives received paramount attention from corporate America.
Often taking the form of corporate restructuring, divestment of peripheral activities,
mass layoffs, or outsourcing, cost control strategies were seen as necessary to preserveor boost
corporate profits and to maintainor gaina competitive advantage. The objective was often
to be the low-cost producer in a given industry, which would typically allow the company to take
a greater profit per unit of sales than its competitors at a given price level.
Some cost control proponents believe that such strategic cost-cutting must be planned carefully, as
not all cost reduction techniques yield the same benefits. In a notable late 1990s example, chief
executive Albert J. Dunlap, nicknamed "Chainsaw Al" because of his penchant for deep cost
cutting at the companies he headed, failed to restore the ailing small appliance maker Sunbeam
Corporation to profitability despite his drastic cost reduction tactics. Dunlap laid off thousands of
workers and sold off business units, but made little contribution to Sunbeam's competitive
position or share price in his two years as CEO. Consequently, in 1998 Sunbeam's board fired
Dunlap, having lost confidence in his "one-trick" approach to management.

1.2 Problem statement.

The reasons for the challenges vary from organization to organization but, fundamentally,
include the spend being spread across many business groups (i.e. decentralized), the
products having unique/custom requirements, and/or sensitive time-lines and quality
standards that cannot be compromised. Generally, these factors override the prudent
activities regarding sourcing and exploring cost savings opportunities, and premium
pricing is accepted at the job level without any focus on organizational leverage.

Many organizations continue to find their complex expense categories difficult to

accurately understand and effectively control, even with dedicated experts in Strategic
Sourcing, Corporate Procurement and Supply Chain Management and applying practices
that have successfully brought other categories under management to achieve cost savings
and process efficiencies.
Cost Control requires determining the best ways to integrate workforces, financial
processes, and varying or divergent information technology platforms into a new,
common entity, thus the interest of the researcher to conduct research on the topic
effects of costs control on financial performance
1.3 Research Objectives.
1.3.1 General Objective
The main objective of this study is to establish how cost control affects financial
performance of companies.
1.3.2 Specific Objectives
To establish how cost control can be applied in organizations specifically Equinox
International Limited.
To establish the challenges that constitutes formation of control reports.
1.4 Research Questions
This paper seeks to organize some basic questions on effects of costs control on
financial performance
Hence, Questions like:
What are the effects of costs control on financial performance?
How can cost control be applied to performance of an organization financially?
What are the challenges on which are faced in cost control to performance of Equinox
International Limited Financially?
1.5 Significance of the study.
The research is considered to have its own academic and policy significances. More
importantly, it is hoped to initiate further study in the subject under consideration. As
the study is not only intended to work on the tip of the problem rather to see the causes
as well, hence, it is believed to instigate people to be concerned and make a research
for such problems and indicate the solution to the policy.

Secondly, as the research is also intended to show the existing situation, it hopefully
shows the magnitude of the problem, the system should be designed to combat the
problem and show the legal issues where it fails. Thus, it may indicate where justified
intervention by the financial Organizations should be had.
Besides, the study will be critical of unjustified interventions, where they exist, and
point to possible ways out.
The study will also act as a bachelors degree award token after the completion as a
requirement for the researchers finishing with the report if proposal granted.
1.6 Scope of the study.
Since, the bounders of cost control in financial organizations are not easily drawn; this
study is concerned primarily with those aspects on effects of costs control on financial
performance which are immediately tied-up with financial performance as direct and

those that relate to the component inputs which together make the transaction safe
and healthy as indirect regulation will be the coverage.
1.7

Conceptual Frame Work

Cost Control (Independent Variable)

Financial Performance
(Independent Variable)
-

Higher costs.
Costs create an inevitable gap
between what the markets return and
what investors actually earn
Lower-cost mutual funds have tended
to perform better than higher-cost
funds over time.

High costs can significantly

depress a portfolio's growth
over long periods
Keeping expenses down can
help to narrow that gap.
Better than higher-cost
funds over time.

CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction.
This chapter will address the views of different scholars on the effects of costs control
on financial performance, and the relationship between the two variables.
2.1 Cost Control
Cost control, also known as cost management or cost containment, is a broad set of cost
accounting methods and management techniques with the common goal of improving business
cost-efficiency by reducing costs, or at least restricting their rate of growth. Businesses use cost
control methods to monitor, evaluate, and ultimately enhance the efficiency of specific areas,
such as departments, divisions, or product lines, within their operations.

During the 1990s cost control initiatives received paramount attention from corporate
America. Often taking the form of corporate restructuring, divestment of peripheral
activities, mass layoffs, or outsourcing, cost control strategies were seen as necessary to
preserveor boostcorporate profits and to maintainor gaina competitive
advantage. The objective was often to be the low-cost producer in a given industry,
which would typically allow the company to take a greater profit per unit of sales than its
competitors at a given price level.
Some cost control proponents believe that such strategic cost-cutting must be planned
carefully, as not all cost reduction techniques yield the same benefits. In a notable late
1990s example, chief executive Albert J. Dunlap, nicknamed "Chainsaw Al" because of
his penchant for deep cost cutting at the companies he headed, failed to restore the ailing
small appliance maker Sunbeam Corporation to profitability despite his drastic cost
reduction tactics. Dunlap laid off thousands of workers and sold off business units, but
made little contribution to Sunbeam's competitive position or share price in his two years
as CEO. Consequently, in 1998 Sunbeam's board fired Dunlap, having lost confidence in
his "one-trick" approach to management.
2.2 Cost Control Applications
A complex business requires frequent information about operations in order to plan for
the future, to control present activities, and to evaluate the past performance of managers,
employees, and related business segments. To be successful, management guides the
activities of its people in the operations of the business according to pre-established goals

and objectives. Management's guidance takes two forms of control: (1) the management
and supervision of behavior, and (2) the evaluation of performance.
Behavioral management deals with the attitudes and actions of employees. While
employee behavior ultimately impacts on success, behavioral management involves
certain issues and assumptions not applicable to accounting's control function. On the
other hand, performance evaluation measures outcomes of employee's actions by
comparing the actual results of business outcomes to predetermined standards of success.
In this way management identifies the strengths it needs to maximize, and the weaknesses
it seeks to rectify. This process of evaluation and remedy is called cost control.
Cost control is a continuous process that begins with the proposed annual budget. The
budget helps: (1) to organize and coordinate production, and the selling, distribution,
service, and administrative functions; and (2) to take maximum advantage of available
opportunities. As the fiscal year progresses, management compares actual results with
those projected in the budget and incorporates into the new plan the lessons learned from
its evaluation of current operations.
Control refers to management's effort to influence the actions of individuals who are
responsible for performing tasks, incurring costs, and generating revenues. Management
is a two-phased process: planning refers to the way that management plans and wants
people to perform, while control refers to the procedures employed to determine whether
actual performance complies with these plans. Through the budget process and
accounting control, management establishes overall company objectives, defines the
centers of responsibility, and determines specific objectives for each responsibility center,
and designs procedures and standards for reporting and evaluation.
A budget segments the business into its components or centers where the responsible
party initiates and controls action. Responsibility centers represent applicable
organizational units, functions, departments, and divisions. Generally a single individual
heads the responsibility center exercising substantial, if not complete, control over the
activities of people or processes within the center and controlling the results of their
activity. Cost centers are accountable only for expenses, that is, they do not generate
revenue. Examples include accounting departments, human resources departments, and
similar areas of the business that provide internal services. Profit centers accept
responsibility for both revenue and expenses. For example, a product line or an
autonomous business unit might be considered profit centers. If the profit center has its
own assets, it may also be considered an investment center, for which returns on

investment can be determined. The use of responsibility centers allows management to

design control reports to pinpoint accountability, thus aiding in profit planning.
A budget also sets standards to indicate the level of activity expected from each
responsible person or decision unit, and the amount of resources that a responsible party
should use in achieving that level of activity. A budget establishes the responsibility
center, delegates the concomitant responsibilities, and determines the decision points
within an organization.
The planning process provides for two types of control mechanisms:
Feedforward: providing a basis for control at the point of action (the decision point); and
Feedback: providing a basis for measuring the effectiveness of control after
implementation.
Management's role is to feedforward a futuristic vision of where the company is going
and how it is to get there, and to make clear decisions coordinating and directing
employee activities. Management also oversees the development of procedures to collect,
record, and evaluate feedback. Therefore, effective management controls results from
leading people by force of personality and through persuasion; providing and maintaining
proper training, planning, and resources; and improving quality and results through
evaluation and feedback.
2.3 Control Reports
Control reports are informational reports that tell management about an entity's activities.
Management requests control reports only for internal use, and, therefore, direct the
accounting department to develop tailor-made reporting formats. Accounting provides
management with a format designed to detect variations that need investigating. In
addition, management also refers to conventional reports such as the income statement
and funds statement, and external reports on the general economy and the specific
industry.
Control reports, then, need to provide an adequate amount of information so that
management may determine the reasons for any cost variances from the original budget.
A good control report highlights significant information by focusing management's
attention on those items in which actual performance significantly differs from the
standard.

Because key success factors shift in type and number, accounting revises control reports
when necessary. Accounting also varies the control period covered by the control report to
encompass a period in which management can take useful remedial action. In addition,
accounting disseminates control reports in a timely fashion to give management adequate
time to act before the issuance of the next report.
Managers perform effectively when they attain the goals and objectives set by the budget.
With respect to profits, managers succeed by the degree to which revenues continually
exceed expenses. In applying the following simple formula, managers, especially those in
operations, realize that they exercise more control over expenses than they do over
revenue.
While they cannot predict the timing and volume of actual sales, they can determine the
utilization rate of most of their resources, that is, they can influence the cost side. Hence,
the evaluation of management's performance and its operations is cost control.
2.4 Standards
For cost control purposes, a budget provides standard costs. As management constructs
budgets, it lays out a road map to guide its efforts. It states a number of assumptions
about the relationships and interaction among the economy, market dynamics, the abilities
of its sales force, and its capacity to provide the proper quantity and quality of products
demanded.
An examination of the details of the budget calculations and assumptions indicates that
management expects the sales force to spend only so much in pursuit of the sales forecast.
The details also reveal that management expects operations to produce the required
amount of units within a certain cost range. Management bases its expectations and
projections on the best historical and current information, as well as its best business
judgment.
When calculating budget expenses, management's review of the historic and current data
might strongly suggest that the production of 1,000 units of a certain luxury item will cost
$100,000, or $100 per unit. In addition, management also determines that the sales force
will expend about $80,000 to sell the 1,000 units. This is a sales expenditure of $80. With
total expenditures of $180, management sets the selling price of $500 for this luxury item.
At the close of a month, management compares the actual results of that month to the
standard costs to determine the degree and direction of any variance. The purpose for
analyzing variances is to identify areas where costs need containment.

In the above illustration, accounting indicates to management that the sales force sold 100
units for a gross revenue of $50,000. Accounting data also shows that the sales force
spent $7,000 that month, and that production incurred $12,000 in expenses. Table 1
summarizes the data that management reviews to identify variances. While revenue was
on target, actual sales expense came in less than projected, with a per unit cost of $70.
This is a favorable variance. Production expenses registered an unfavorable variance
since actual expenditures exceeded the projected. The company produced units at $120
per item, $20 more than projected. This variance of 20 percent significantly differs from
the standard costs of $100 and would call management to action if the variance exceeded
acceptable levels (levels that were established before manufacturing began).
2.5 The Role of Accounting
Accounting plays a key role in all planning and control. It does this in four key areas: (1)
data collection, (2) data analysis, (3) budget control and administration, and (4)
consolidation and review.
2.6 Data Collection.
Accurate and timely information is the foundation of any accounting system, and thus
detailed cost data are essential to any cost control endeavor. Management must
understandin great detailhow funds have been spent in the past and how they are
being spent currently. As a result, companies invest large sums into sophisticated and
error-resistant accounting systems in order to gain a nuanced understanding of their
finances.
2.7 Budget and Control Administration.
The accountants play a key role in designing and securing support for the procedural
aspects of the planning process. In addition, they design and distribute forms for the
collection and booking of detailed data on all aspects of the business.
2.8 Strategic Cost Control
Management relies on such accounting data and analysis to choose from several cost
control alternatives, or management may direct accounting to prepare reports specifically
for evaluating such options. As the Chainsaw Al episode indicated, all costs may not be
viable targets for cost-cutting measures. For instance, in mass layoffs, the company may
lose a significant share of its human capital by releasing veteran employees who are
experts in their fields, not to mention by creating a decline in morale among those who
remain. Thus management must identify which costs have strategic significance and
which do not.

To determine the strategic impact of cost-cutting, management has to weigh the net
effects of the proposed change on all areas of the business. For example, reducing
variable costs related directly to manufacturing a product, such as materials and
transportation costs, could be the key to greater incremental profits. However,
management must also consider whether saving money on production is jeopardizing
other strategic interests like quality or time to market. If a cheaper material or
transportation system negatively impacts other strategic variables, the nominal cost
savings may not benefit the company in the bigger picture, e.g., it may lose sales. In such
scenarios, managers require the discipline not to place short-term savings over long-term
interests.
One trend in cost control has been toward narrowing the focus of corporate responsibility
centers, and thereby shifting some of the cost control function to day-to-day managers
who have the most knowledge of and influence over how their areas spend money. This
practice is intended to promote bottom-up cost control measures and encourage a
widespread consensus over cost management strategies.
2.9 Summary
Control of the business entity, then, is essentially a managerial and supervisory function.
Control consists of those actions necessary to assure that the entity's resources and
operations are focused on attaining established objectives, goals and plans. Control,
exercised continuously, flags potential problems so that crises may be prevented. It also
standardizes the quality and quantity of output, and provides managers with objective
information about employee performance. Management compares actual performance to
predetermined standards and takes action when necessary to correct variances from the
standards.

CHAPTER THREE

METHODOLOGY

3.0 Introduction
This part presents details of the research plan information about how data is to be
collected, the study population, sample unit and design, data collection instruments, and
data analysis and data presentation techniques.

3.1 Study Design

The study is a cross sectional descriptive and purposive; basically both qualitative and
quantitative methods will be used. The study will assess issues concerning effects of
costs control on financial performance and issues like evidence as to whether or not Cost
control does have a positive effect on the firms financial performance. In addition, the
effectiveness of Cost controls? The organizations Finance established and functioned will
be checked by the researcher and lastly what power is vested with them, what factors
are currently aggravated the rate of performance with the help of cost control.
3.2 Data Collection
Both primary and secondary data will be collected. Research instruments will be
developed for each category of data as indicated below;
3.6 Research Methods
1

Interview

Questionnaires

Observation

1) Interview schedule.
Data from Equinox International will be collected in the study parishes using an
interview schedule administer by me the researcher. Sample size of 70 respondents is
targeted in this category. This method will be used since it is suitable for both
illiterates and literates groups of people to give data and answer the questions needed
by the researcher. It simplifies for the researcher if questions are interpreted in the
language understood by the farmers.

2) Observation method

Direct observation is another tool of data collection to be used by the researcher when
visiting the Equinox International in company, Nakasero. Here the researcher is to use
logical conclusion after observing the status of cost control at the organization and
how it affects the financial performance of the organization.
3) Questioners
Structured questioners are designed to capture the above question from the different
stake holders. The method to be used while collecting data is mainly qualitative
information .however, thereafter there is an analysis to assess the difference in some
perception issue between the different groups of respondents.
3.7

Data Analysis Methods

Qualitative analysis will be used throughout the research though some aspects need a
quantitative analysis data analysis.

REFERENCES:
Anthony, Robert N., and Vijay Govindarajan. Management Control Systems. Chicago:
Irwin, 1997.
Cooper, Robin, and Robert S. Kaplan. The Design of Cost Management Systems. Upper
Saddle River, NJ: Prentice Hall, 1998.
Cooper, Robin, and Regine Slagmulder. "Micro-Profit Centers." Management
Accounting, June 1998.
Hamilton, Martha M. "Who's Chainsawed Now? Dunlap Out as Sunbeam's Losses
Mount." Washington Post, 16 June 1998. Rotch, William, et al. Cases in Management
Accounting and Control Systems. 3rd ed. Englewood Cliffs, NJ: Prentice Hall, 1995.
Shank, John K., and Vijay Govindarajan. Strategic Cost Management. New York: Free
Press, 1993.