COST MINIMIZATION AS AN APPROACH TO IMPROVING EFFICIENCY IN SMALL SCALE INDUSTRIES
CHAPTER ONE
1.0 INTRODUCTION
A business whether small or big can be seen as an organization that is set up for the purpose of producing goods and services. In addition to this, managers of either small or large scale industries are set up for the common goal of minimizing costs and maximizing profits.
Brown S. P. (1967) defined cost as in the economic sense, to mean the summation of all outlays of an operational nature. He further stated it to mean an amount which represents interest on investment and/or profits. All firms continually need to reduce costs, not only in times of recession, but in periods of expansion and consolidation. Therefore cost minimization or reduction is a situation whereby a company cuts down on all unnecessary costs in order to achieve a higher level of profit. This definition can be further illustrated with an example.
BRIEF ILLUSTRATION
Let us assume the cost of producing product A is N10, and it is being sold at a price of N15 – “ CASE A”.
In “CASE B” the cost of producing has fallen down to N5 with the same N15 being realized. Reason for this reduction in cost, could be that some workers that weren’t useful, were land off; also the raw materials were used upto the maximum. It will also be advisable for the manufacturer to produce at the lowest cost possible so that it will earn a higher margin of profit.
Lipsey in his book, “Introduction to Positive Economics” defined small scale industry as the unit that employs factors of production to produce commodities, that it sells to other firms, households and central authorities. Aside from this definition, small firms can also be classified or defined in terms of respective total assets, fixed capital investments, manpower, relative position of the firm within its industry, number of employees, ownership, structure and management styles. The 1989 industrial policy of Nigeria defined small scale as those with total investment of between N100,000 and N2,000,000 exclusive of land and working capital. The Administrative staff College of Nigeria (ASCON) defined small scale industries as organization whose cost do not exceed N15,000, including the cost of land on which the enterprise is built.
Cost minimization/reduction, if properly practiced, will greatly improve efficiency in small scale industries. The process or rather decision to reduce costs have to be taken by the manager and it will lay down clearly defined goals for the rest of the company pursue. Some of the costs to be minimized include purchase prices, use of materials, manufacturing costs, fixed assets cost and administrative costs. Cost minimization is especially useful because it allows for efficient utilization of capital available to the small scale industries.
Small scale industries are usually one-man industries or rather, a sole proprietorship company; raising of funds is usually from the owners personal income or donation from friends and relations. Small scale industries are mainly found in business like shop, hotels, restaurants and some small manufacturing companies.
Small manufacturing industries have played dynamic roles in the Nigerian economy and these roles include high contribution to the gross domestic products, employed generation and technological development.
