THE EFFECT OF COSTING METHODS ON PRICE DETERMINATION IN A MANUFACTURING COMPANY

1.0 Introduction

A costing method is a method of costing which is designed to suit the goods that are processed or manufactured or the way that services are provided. It follows therefore that each firm will have a costing method which has unique features.

Nevertheless, there will be recognizable common features of the costing system of the firm who are broadly in the same line of business.

Conversely, firms employing substantially different manufacturing methods, for example, a food processing and jobbing engineering factory will have distinctly different costing methods as will the huge variety of services organization. It must be clearly understood that whatever costing method is employed, the basic costing principles relating to analysis, allocating and apportionment will be used.

Categories Of Costing Methods

There are two broad categories of product costing methods; namely:

1. Specific order costing and
2. Continuous operation or process costing.

Specific Order Costing

This can be defined as the basic costing method applicable where the work consists of separate contracts, jobs or batches.

In most cases, the job or contract is the cost unit and frequently but not always, the jobs or contracts are different from each other. The main sub-divisions of specific order costing are:

1. Job costing
2. Control costing
3. Batch costing

Continuous Operation / Process Costing

This can be defined as the basic costing method applicable where goods or services result from a sequence of condition or repetitive operations or processes. Costs are averaged over the unit produced during the period. It can also be called unit costing.

The key feature of this definition is that operation costing seeks to establish the unit cost per unit during a period for a number of identical cost units.

The main sub-divisions of operation costing are:

1. Process costing including joint product and by-product costing.
2. Service/ function costing.

This type of costing although not relating to production cost unit uses similar principle whereby an average cost is established per unit of service. For example, an average cost per meal supplied could be calculated for the content which is a service cost center.

Price Determination

Price is a value expressed in monetary terms. Value is defined as a quantity expression of the power a product has to attract other products in exchange.

Price may also be defined as the amount of money which is needed to acquire in exchange for some combined assortments of product services.

Marginalist pricing is a process by which prices are set to achieve a particular maximum value for some objectives. It compares the marginal cost of extra output with the marginal extra benefits from the output.

The objective to maximize profit reaches its maximum value when marginal cost (continue arising) equal the marginal benefit of the unit produced.

Marginalist pricing is used in theoretical explanations of price and output decisions. For example, a firm with a profit maximizing objective will produced at a level of output and sell at a price where MC= MR, a firm with a revenue maximizing objectives regardless of cost will produce a level of output and sell at a price where MR=0.

Full Cost Pricing

The traditional account methods of attempting a price product is full cost plus pricing formula. By this method, sales prices are established by:

1. Calculating the full cost of the profit:

   This may be a full production cost or it may include absorbed administration, sales and distribution overhead as well.

2. Adding a percentage mark up for profit:

   This mark up is traditionally considered to be rigidly applied to all production with no flexibility in the size of the margin added to any individual product.

1.1 Background Of The Study

The History Of Unilever Nigeria Plc

Unilever Nigeria Plc was incorporated as Lever Brothers (West Africa) Ltd on 11th April 1923 by Lord Leverhulme, but the company’s antecedents have to be traced back to his existing trading interests in Nigeria and West Africa generally and to the fact that he had since the 19th century been greatly involved with the soap business in Britain.

Unilever Nigeria Plc started as a soap manufacturing organizations in Nigeria. After series of mergers and acquisitions the company diversified into manufacturing and marketing of foods, non-soapy detergents and personal care products. These mergers and acquisitions brought in lipton Nigeria Ltd in 1985, cheese brough ponds industries Ltd in 1988. The company changed its name to Unilever Nigeria Plc in 2001.

Unilever Nigeria Plc is a public liability company quoted on the Nigeria stock exchange since 1973 with Nigeria currently having 49% of equity holdings. It is an organization that is equipped with many and different communication gadgets to and in its operation. The communication system include computers with internet connectivity and wide area network, telephones and tele printers, fax machine and other communication apparatus to make the passage of information from one department to another and from one branch to another easy and fast.

The company has a powerful organizational structures and organizational chart which makes the flow of authority and accountability possible. Its contact address is at 1 billingsway Oregun Ikeja Nigeria.

1.2 Statement Of The Problem

The following facts are the statement of research problems:

1. Inefficient reliable system of population control which makes men and machine change frequently from one job to another.
2. Most firms fail to plan their jobs on advice, and instructions are not well issued to all departments thereby leading to deficiency and lack of progress on the organization.
3. Lack of effectiveness in an organization thereby leading to bad system of production control, work documentation material and labour of production control, material and labour booking.
4. Firms find it difficult to ascertain cost of production because of the by-product produced.
5. Difficult of cost control:many companies find it difficult to control their cost thereby leading to material usage and basis, pilferage damage and loss of plant and tools.
6. Difficulty in deciding how individual items of cost shall be treated and what method of costing finding shall be used. This is usually common in manufacturing companies.
7. Charging overhead to products lead to total cost figure. This is normally misleading when used as basis for decision making thereby giving rise to different figures.
8. Competitive price of rival firms and pressure of inflation on cost force companies into regular review of their prices.
9. As price are based on cost, the calculated selling price will be incorrect- some too high, some too low, this is seen where firm with several branches in various towns set different prices in each branch. Branches in remote locations might set higher prices and in lower areas might set lower prices. This constitutes problems in most manufacturing firm.
10. Many firms face the problem of indecision of whether to apportion or process a joint product up to the point of separation.

1.3 Aim and Objectives Of The Study

The aim of the study is to investigate the Effect of Costing Methods on Price Determination in a Manufacturing Company. In achieving this aim, the following specific objectives were laid out as follows:

1. To ensure reliable system of production control whereby men and machine do not change from one job to another.
2. To ensure that individual item of cost is well treated so that appropriate costing method can be used.
3. Instructions must be well issued to all departments in order to bring about inefficiency and progress in the organization.
4. To ensure that prices based on cost will not make selling price too high or low. Branches should maintain the same standard price irrespective of the location or area.
5. To ensure that cost of production is well ascertained irrespective of the by-product produced.
6. To ensure that firms overcome the problem of indecision whereby joint product is being processed and apportioned up to the point of separation.
7. To ensure that firms see the advantage of adopting the use of costing methods in determining the price of their products.
8. To ensure a positive pricing policy in a period of inflation which will create a price reduction policy.
9. To make sure that firms adopt the use of costing methods in allocating their product and cost units.

1.4 Research Questions

This is a section where the researcher highlighted several questions which are deemed necessary to be answered. Among the questions to be answered in this research work are:

• Does job costing brings about a reliable system of production control on manufacturing?
• Does costing method serve as a tool for determination of prices in manufacturing industry?
• Will costing technique enhance a manager’s understanding on product cost?
• Does inefficient reliable system of production control makes men and machine change from one job to another?
• Will competitive prices bring about inflation on cost?
• Does the use of costing method actualize a firm’s objectives?
• Is pricing policy one of the several factors by which marketing managers attempt to sell their company products?
• Is the use of costing method a determinant for a firm’s profitability?
• Is the use of costing method relevant to individual responsibility?
• Will abnormal process losses cause inefficient work, plant breakdown in manufacturing industry?
• Does the use of double entry system calls for process costing?
• Does job costing bring about efficiencies in the management of the organization?
• Will cost control be difficult if responsibility is spread over several managers?

1.5 Statement Of Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: The use of costing method is not a determinant of a Firm’s profitability.
• H1: The use of costing method is a determinant of firm’s Profitability.

Hypothesis Two

• H0: The costing technique does not enhance a manager’s understanding on product cost.
• H1: The costing technique enhances a manager’s understanding on product cost.

1.6 Significance Of The Study

This aspect of the work deals on the possible benefits derivable by any known and interested readers of this work.

Although, the significance of costing methods on price determination cannot be repeatedly over-emphasized, but for the purpose of information this research work tends to convey and consequently for the purpose of simplification, some of the important significance of costing methods in price determination includes:

1. Costing method which is the main basis of this study will ensure that prices based on cost do not make selling price too high or low. Branches should maintain the same standard price irrespective of the location or area.
2. This study will help to ensure that individual item of cost is well treated so that appropriate costing method can be used.
3. It will help to ensure the sustenance of a positive pricing policy in a period of inflation which will create a price reduction policy.
4. This study also helps to ensure that the cost of production is accurately ascertained irrespective of the by-product produced.
5. This study will enable firms overcome the problem of indecision where by joint product is being processed and apportioned up to the point of separation.
6. It helps to ensure that firms see the advantage of adopting the use of costing methods in determining the prices of their products.
7. Finally, it will facilitate the adoption of the use of costing methods in allocating product and cost units by firms.

1.7 Scope Of The Study

This research work examined the importance of costing method in a manufacturing firm. This costing method can be analyzed in greater depth, that is it can be grouped into process costing, where in most firms, manufacturing is on a continuous basis, as a result of which a process may frequently be uncompleted at the end of an accounting period.

One way to solve this is by calculating what is known as the equivalent or effective production, to which is apportioned, the cost incurred. This will be discussed in details in this project. It is grouped into job and batch costing which is under specific order costing.

1.8 Limitations Of The Study

This research work was not achieved on a platter of gold that is easily and effectively smooth, without the researcher encountering some problems and obstacles on his way.

Below are some of the problems encountered by the researcher in the course of the study:

• Financial Problem: It was not financially easy for the author to conduct the oral interview in the company considering daily transportation, cost and other costs. On the other hand, the cost of typing and binding this project by the author and other miscellaneous cost considering the fact that the author or researcher is a student.
• Time Factor: The academic work of the author gave limited time for this work considering the fact that she is a student and has to combine her assignment, her lectures, tests and other school works with her project.
• Unwillingness on the Part of the Company’s Personnel: Unwillingness to disclose certain information for security purpose as well as distorted and biased reports and responses from the personnel of the company also served as another limiting factor.
• Another limiting factor is that the interview periods were frequently and rescheduled because of work loads and pressure of the officials being interviewed.

1.9 Definition Of Terms

Batch costing:

This method is employed in many light engineering works where a number of identical items are produced in one batch.

Joint product:

There is two or more product resulting simultaneously from an operation. They are produced together and joint cost is incurred.

Scrap:

It is discarded material, having some recovery value which is usually either disposed off without special treatment.

By-product:

It is the term used when the product has a small sales value compared with the main product.

Spoilage:

This occurs when produced units are substandard and must be either discarded or sold off scrap or cheaply.

Cost center:

A cost center could be a location of a person or an item of equipment connected with an undertaking in which costs may be ascertained and used for the purpose of cost control.

Job costing:

A job is a mini-contract, to produce a given product at the specification of the customer. A job involves the product of goods but not the rendering of services.

Process costing:

This method is suitable where products are manufactured by a set of processes, which are not isolated to individual jobs as in job costing.

Service costing:

It is applied to operation costing service as opposed to products and may be used for a service undertaking or for a service cost center within an understanding.