THE IMPACT OF OPPORTUNITY COSTS IN DECISION MAKING IN ACCOUNTING
This research contains and examines the introduction of the study the importance of opportunity costs in decision making in Accounting ( A case study of Nigerian Breweries plc). It focuses on the extent to which opportunity cost has helped in the decision making of Nigeria Breweries. In Nigerian Breweries, opportunity cost has been adapted to make the best alternative decision.
The population of this study includes all the relevant costs, opportunity costs, products and services of Nigerian Breweries plc. (Lagos depot). The main sources of data comprised both primary and secondary data. The primary data were obtained by interview with the research manager while secondary data were gathered through annual reports and accounts of the company’s Journals, News papers e.t.c.
Data collected for this research were analyzed through the use of regression, least square and financial analysis (SWOT analysis and B. pest analysis)
From the findings of this research, it was discovered Nigerian Breweries must decide their objectives, willingness to assume risks, the best alternative and profit objective before making decision.
The research concludes that opportunity cost is an important tool for decisions making and has a positive impact on the growth of the company (NB PLC).
TABLE OF CONTENTS
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
- Justification Of The Study 6
1.5 The Scope and Limitation of the Study.
1.6 Research Questions
1.7 Research Hypothesis
- Plans of The Study 10
1.9 Definition of Terms
2.0 Literature Review
- Relevance of Opportunity Costs 15
2.3 Executive Summary/ Historical Background
2.4 Cost Categories in Decision Making
- Application of Relevant Costs 25
2.6 The Assumptions in Relevant Costing.
2.7 Other Tools for Decision Making
2.8 The Decision Making Process
2.9 Examples of Qualitative
Factors and Quantitative Factors
- The Impact/Effect Of Opportunity Costs
In Nigerian Breweries Plc (Nbplc) Decision Making
2.11 Nigerian Breweries Plc- Value Addition
Through Expansion and Innovation
- Financial Variables 39
3.0 Research Methodology
- The Study Populations 45
- Area of the study 45
3.4 Research Design/ Instruments
3.5 Interview for Data Collection.
3.6 Method of Data Analysis
4.0 Data Presentation and Analysis
4.2 Nigerian Breweries Plc Strategic Intent
4.3 Capital Structure
- Descriptive Models For Decision Making 62
4.5 Regression Analysis
4.6 Analysis of Least Square Model
4.7 Swot Analysis of Nigerian Breweries Plc
4.8 B. Pest Analysis Of Nigerian Breweries Plc .
4.9 Test of Research Hypothesis
5.0 The Summary of Findings, Conclusions
5.1 Summary of Findings
1.1 BACKGROUND OF THE STUDY
Decision making is a vital part of every manager’s job. Decision making involves choosing between different courses of actions. Opportunity cost analysis is an important part of a company’s decision making processes.
According to ACCA (2000), decision making information is different from the information recorded in financial accounts and conventional cost accounts. Decision making is essentially choosing among several courses of action. Accountants play an importance role in the decision making process, not as decision makers but as collectors, reporters and analyzers of relevant information. Management decision making is often a matter of comparing two or more alternative courses of action.
According to Kishore, (2003), Opportunity cost is the value of a benefit scarified in favor of an alternative course of action. It is the maximum amount that could be obtained at any given point of time, if a resource was sold or put to the must valuable alternative use that would be practicable. He further said that opportunity cost is the process whereby opportunities costs are ascertained.
According to Irwin, (2005), An opportunity cost is defined as the value of a forgone activity or alternative when another item or activity is chosen. Opportunity cost comes into play in any decision that involves a trade off between two or more options. It is expressed as the relative cost of one alternative in terms of the next best alternative. He further said that opportunity cost seeks ti study the relationship between relevant cost, revenue and profit at differing activity levels and can be useful guide for decision making.
According to CIMA, (2004), relevant costs are costs appropriate to a specific management decision. These are represented by future cash flows whose magnitude will vary depending upon the outcome of the management decision made. For the purpose of decision making, the costs and benefits which should be used for decision making are relevant costs. Costs that have been computed for meeting stock valuation requirements must not be used for decision making purpose. When trying to established which costs are relevant to a particular decision you may discovered that some costs will be relevant in one situation but irrelevant in another.
Drury (2008), affirmed that the relevant costs and benefits required for decision making are only those that will be affected by the decision costs and benefits that are independent of a decision are obviously not relevant and need not be considered when making that decision. The relevant financial inputs for decision making are therefore future cash flows, which will differ between the various alternatives being considered. Since decision making is concerned with choosing between future alternative courses of action and nothing can be done to alter the past, than past costs are not relevant for decision making. To make the best decision the accountants need to accurate weigh the relative benefits and costs of various alternatives. The accountants’ role in decision making is primarily that of a technical expert on financial analysis with the help managers focus in the relevant information that will lead to the best decision. Making business decision require managers to compare two or more alternative courses of action. Accountants should use two criteria to determine whether the information is relevant,
- Information must be an expected future revenue or cost.
- It must have an element of difference among the alternatives.
Opportunity cost is central to decision making because it is the value of next best alternative. The primary role of management accounting in organization is to help measure the opportunity costs of resources.
Opportunity cost is defined by many, but the main focus of everyone of them is on the “contribution or profit that is forgone (rejected) by using limited resources for a particular purpose” opportunity cost remains at the heart of study of decision making today, its being seen as useful and important both in the calculation of merit of competing alternatives and as a way of describing the preferred alternatives.
1.2 STATEMENT OF THE PROBLEM
The importance of opportunity cost in decision making is a necessity, useful and important in today’s business. If they are to survive and grow. Despite the importance of opportunity cost, some of the major problems of this study, include the following:
- How opportunity cost in decision making affect the level of performance in Nigerian Breweries.
- How opportunity cost is applied in decision making of Nigerian Breweries.
- What factors affect the importance of opportunity costs in decision making in Nigerian Breweries.
- How opportunity costs aids resources allocation in Nigerian Breweries.
- What are the effects of opportunity costs in decision making?
1.3 OBJECTIVE OF THE STUDY
The objective of this study is to examine the importance of opportunity costs in decision making in accounting. There are series of relationship between costs, opportunity cost and profits. An understanding of these relationships are useful to Nigerian Breweries and management.
The purposes of this study are to:
- Identify the decision yielding the best alternatives in Nigerian Breweries.
- Find out how accountant apply opportunity costs in decision making.
- Ascertain how opportunity costs in Nigerian Breweries affect the level of performance.
- Find out how opportunity costs help in allocation of resources.
- Assess and describe how opportunity cost become part of the management decision making process.
- Find out what factors affect opportunity cost in decision making in Nigerian Breweries.
- Ascertain the extent of the relationship between opportunity costs and NB PLC decision making.
- JUSTIFICATION OF THE STUDY
There are many good reasons why, this study, focuses on the importance of opportunity cost in decision making. The first reason is that costs and opportunity costs are important feature of many business decisions. A significant input in choosing among the alternatives is cost. All other things being equal, the alternative with the lower cost should be chosen.
This study will educate the entire public on how opportunity cost is an effective tool applied by managers in decision making in their firms. Opportunity cost, evaluation has many practical business applications as along as resources scarcity, exists opportunity costs will exist. Analyzing the opportunity cost forms an essential part of business firm’s decision making process.
This study will be of immense benefit to the following group of persons.
- Business organizations especially, Nigerian Breweries plc.
- Students of Accountancy, profession and other allied profession
- Researcher on related study.
- The general public.
1.5 THE SCOPE AND LIMITATION OF THE STUDY.
This study as a management tool for decision making would have covered all the Nigerian Breweries located in different states of the federation but the researcher limited the topic to only Lagos state due to time constraints, distance and financial handicap. The study of Nigerian Breweries plc. Lagos shall also serve other states of the federation since the same techniques are applied in other depot. Therefore, the researcher will rely heavily on the Nigeria Breweries Lagos depot.
The main focus of study borders on decision making, level of performance, resources allocations and factor affecting opportunity cost in decision making.
The following functional areas on the importance of opportunity costs in decision making shall be critically examined:
- Effectiveness of opportunity costs and relevant costs.
- Does the company have stated objectives?
- The impact of opportunity costs in NB PLC decision making.
The limitations of this study are:
- Reluctance of the staffs to be interviewed.
- Limitation in time frame allowed for the research work complied
with tight academic schedule.
- Inadequate of data to meet the research need of this project
1.6 RESEARCH QUESTIONS
To guide the study, the following research questions were formulated as follows:
- Is opportunity cost used as a management tool for decision making in Nigerian Breweries.
- Has the application of opportunity cost help Nigerian Breweries to be efficient and effective in its operation?
- To what extent have opportunity costs in Nigerian Breweries affect level of performance.
- What are the factors that affect opportunity cost in Nigerian Breweries?
- To what extent has opportunity cost solve decision problem.
1.7 RESEARCH HYPOTHESIS
The hypothesis attest to the questionnaire belief that opportunity cost is management tool for decision making. Four hypotheses have been formulated to further test the result of research questions follows:
Ho: There is no significant relationship between opportunity costs and decision making.
Hi: There is significant relationship between opportunity costs and decision making.
Ho: Opportunity cost analysis is not extensively applied in Nigerian Breweries plc.