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A Study on Cost Accounting System and Pricing Policy of Printing Companies in Ethiopia
D.Lalithia Rani Professor Department of Commerce and Management Studies Andhra University Visakhapatnam (India)
Fitsum Kidane Ph.D Research Scholar Department of Commerce and Management Studies Andhra University Visakhapatnam (India)
Abstract The organizations and managers are most of the times interested in and worried for the costs. The cost accounting systems can be important sources of information for the managers of printing companies in Ethiopia. Cost accounting supplies cost data and information to management
to make more informed decisions. This study is focus on the cost accounting and pricing system of largesize and medium printing companies. The researcher is using both primary and secondary data. The
nature of production activities of printing companies warrants the use of customer order costing system since products are heterogeneous and are based on customer specifications. Regarding the pricing policy of printing companies, the survey result shows that all of the printing companies under study use cost-plus pricing method.
Key Words : Cost accounting, Costing system, Job order costing, Pricing.
Introduction The nature and functioning of business organizations in the modern business world have become very complicated. They have to serve the needs of variety of parties who are interested in the functioning of the business. These parties constitute the owners, creditors, employees, government agencies, tax authorities, prospective investors, and the management of the business. The business has to serve the needs of these different categories of people by way of supplying different information. In order to satisfy the needs of all these group of people a sound organization of cost accounting system is very essential. Copyright © 2012. Prof. D.Lalithia Rani & Fitsum Kidane. This is an open access refereed article distributed under the Creative Common Attribution License which permits unrestricted use, distribution and reproduction in any medium, provided the original work is properly cited. 201
or Volume . Issue . journals. London defines “Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. Thus. marketing decisions. 2000).Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 Cost Accounting is accounting for cost aimed at providing cost data. 2004). capital investment decisions. needs more detailed information on operations. Other secondary sources of data include books. Even though. the focus of cost accounting is shifting from inventory valuation for financial reporting purpose to supplying cost information to management for decision making.II June . The Institute of Cost and Management Accounting. Cost accounting supplies cost data and information to management to make more informed decisions. job order costing and process costing have been used to cost product and services and many companies continue to use these traditional costing systems (Garrison and Noreen. aside from historical information supplied by financial accounting in the conventional financial statements. 1993). numerous studies in this area have provided substantial empirical and theoretical contributions to the field of cost accounting system this area of investigation is still in its infancy. two costing methods.II . Within organizations treating each job as a single output unit. Primary data were collected from respondents through questionnaires and interviews. setting standard cost. Cost data and analysis helps managers in making decisions in such areas like pricing. Secondary data were obtained from the enterprises' records. modern cost accounting is often called management accounting because managers use accounting data to guide their decisions (Rayburn. Literature Review The importance of accounting in managerial decisions has long been recognized in the literature. management. little however is known about cost accounting system and pricing policy in printing Industries in Ethiopia. The information supplied by cost accounting acts as a tool of management for making optimum use of scarce resources and ultimately adds to the profitability of business (ARORA. Historically. cost estimates and cost analysis. controlling.2012 202 . Methodology of the Study The researcher used both primary and secondary data. This present study aims to make some contributions to the currently limited knowledge on this subject. In fact. Cost accounting is broad and extends beyond calculating product costs for inventory valuation. and aims to offer some relevant insights into the daily practice of cost accounting and pricing policy in Ethiopia printing industries. and other documents that are related to the topic under study. which GAAP dictates. profit planning. actual cost data. Interestingly. Objective of the Study The general objective of the study is to introduce an overview of cost accounting system and pricing policy of large-size and medium printing companies in Ethiopian. Particularly in the field of cost accounting. The main objective of cost accounting is communicating cost data and information to management for planning. and evaluating resources. cost manuals and reports. The job order costing system seeks to estimate costs of production for different jobs included in specific customer orders. cost management decisions and others. In modern organizations. related websites in the internet. statement and reports for the purpose of managerial decision making.
5. he stated that job costing should be used when the company output is made of various jobs or orders from separate customers. Most pricing strategies imply a relative price level related to costs. 4. target pricing. business organizations are likely to adopt diverse pricing strategies. or customers. RESULTS AND FINDINGS This section provides analysis of the data gathered through questionnaire. Different pricing approaches are used by business organizations. competition. 2. material requisition forms. Kaplan. material and labour bookings. & Young. manufacturing. batch or lot of a product or service.Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 when multiple products are produced within a given period. Secondly. The documents used here are the Material requisition forms. The predetermined overhead rates generally use labour or machine time as the allocation bases. Cost accumulation procedure. 3. 2005). Drury (1992) has described the procedures used in a job costing system and the accounting entries necessary to record the transactions taking place in a company using job costing. Noble and Gruca (1999) define pricing strategy as the means by which a pricing objective is to be achieved. & Brewer. overheads must be charged to jobs and this can be done using either the traditional methods based on the labour or machine hours overhead absorption rates or using the cost drivers rates of an activity-based system. There are as follows:1. One area where cost analysis is used in managerial decision making is in setting product or services prices. These are industries where the companies offer a wide variety of products or services. it will depend on the costing technique used. Costing system. time tickets and the job cost sheet. which include cost-based pricing. 2008 and Atkinson. they must be assigned using the predetermined overhead rates. labour time tickets must be used for the assignment of direct materials and labour to the various jobs. Manufacturing cost. Horngren et al. Lucey (1993) also examined the mechanics of a costing system where job costing is employed. From their point of view. and others. Cost center. While analysing the various costing methods.II . for profits to be derived from a job costing system. They first identified the type of industries where job costing can be used. Determinants are the internal and external conditions that determine managers' choices of pricing strategies. (1999) defines Job costing as a costing system in which the cost of a product or service is obtained by assigning costs to a distinct unit. He first stated that this system must be used where the work to be performed is on customer's requirements. market-based pricing. Issue . hospitals or legal firms. The cost accounting system and pricing policy of the printing companies are classified under the following. Drury (1992) advocated the use of an integrated cost accounting system as this reduces or avoids the duplication of records as found in an interlocking system. this type of costing system is most relevant (Garrison. he also stated that there are two alternative ways of designing a job costing system: either as an integrated cost accounting system or as an interlocking cost accounting system. Once prime costs have been gathered. Also. namely: furniture. Volume . this system must be based on good records obtained from production. Noreen.2012 203 . He finally pinpointed that. works documentation. Pricing policy and system. then concerning the manufacturing overheads. Garrison and Noreen (2003) also contribute in the advancement of the knowledge on job costing. interview and secondary data.II June .
camera. printing. etc. insurance etc. Costing system As indicated in the literature. the direct material cost is charged to jobs by taking the cost of the item as per the stock card valuation. speed master. administrative vouchers. depreciation. ink. and chemicals. film.) which can be traced to specific printing products in an economically feasible way. web. manufacturing costs are commonly categorized as: direct material. camera. classified and analyzed. web operators. The overhead cost is a summation of the cost of indirect materials (film. newspaper. that cannot be charged directly to specific printing products. janitors and maintenance). According to the literature. and Platin. GTO.2012 204 . Materials are priced using weighted average costing method. platin. The material cost for the product “Rubber Stamp” is composed of the cost of stamp handle. GTO. labor cost and manufacturing overhead. supervisors. The survey result indicates that a variety of cost centers are observed in the printing companies under study. plate. magazines. paper and stamp handle constitute the direct materials of printing companies under study since the costs of paper and stamp handle are easily and economically identified with the specific products of the printing companies. chemical. The data is collected.II June . Manufacturing cost Respondents were asked how the costs are classified. camera. all printing companies in the study classify costs based on the nature of expense item as material cost. plate. The cost centers for the remaining organizations (19 companies. stickers and note books) of the printing companies under study are composed of the cost of paper. direct labor and manufacturing overheads. Stamp handle constitutes the direct material for the Rubber Stamp. indirect labor (salaries of production manager. the cost of paper constitutes the direct material cost. speed master. and all other manufacturing costs such as utility. commercial papers. film. platine. chemical. In all printing companies under study. In general. montage. platin. cord. cutter and stitching. The nature of production activities of printing companies warrants the use of customer order costing system since products are heterogeneous and are based on customer specifications. which costs are direct and indirect in calculating the cost of the product. 84%) are: computer. The cost centers for the majority of the printing companies (101 companies. staples and other supplies. Common cost centers observed in all printing companies under study are Computer. Among those material costs. Issue . Camera. The customer order costing system is used by all printing companies in Ethiopia. The direct labor cost charged to products consists of the labor of machine operators (computer. 16%) are: computer. and other supplies). cord. The material costs for major products (books. costing system is needed to accumulate the costs of goods manufactured. quality controllers. Volume . and binding. ink.II . how is the direct material cost charged and how material are priced in their companies. According to the survey result.Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 The researcher has analyzed the above factors and they are as follows. stitching. Cost Centers Respondents were asked the cost centers that exist in their production department.
According to the survey result 18 percent of the printing companies under study determine three rates: Manufacturing Overhead Rate. The costs tracked and accumulated for product costing purposes are categorized as direct materials. The remaining 82 percent companies determine and use only manufacturing overhead rate. material requisition. Accordingly. and labor time tickets. material requisition. The materials to be used must be identified as direct materials and indirect materials. and General and Administrative Expense Rate. The data is collected and analyzed. how direct material cost.II . Respondents were asked the different overhead rate prepared. Issue . The total direct labor cost for a product (job) is then the sum of all the direct labor costs accumulated in the cost centers where the product is processed. The remaining 82% of the respondents under study responded that job order cost sheet. Direct Labor Cost All respondents determine the direct labor cost of a product (job order) by multiplying an established direct labor rate by the actual direct labor hours consumed by the job. job order cost sheet. some variation in the way the direct labor rate is determined by the printing companies. The direct labor cost determined on the basis of the labor rate and the actual direct labor consumed is then recorded in the job cost sheet. however. 18% of them responded that the source documents (forms) they use for cost accumulation purpose are: production order. the material requisition for job order costing will use the job order number given to the job order cost sheet. material issue voucher. There is. they compute the direct labor cost rate by dividing the daily-salary of operators by the number of daily working hours. After the requisitions are segregated into direct and indirect materials. material issue voucher and labor time tickets as basic source documents for accumulation of production costs. The survey result indicates that 36 percent of the respondents under study the variables considered in the determination of direct labor rate are: annual salary of operators. and number of operators. The variables considered by the remaining 64 percent respondents in the determination of direct labor rate are: daily-salary of operators and the number of daily working hours. The direct labor rates differ from cost center to cost center. Respondents were also asked the basis used for overhead cost allocations. Selling and Distribution Expense Rate. annual effective working days. direct labor and manufacturing overhead costs are accumulated for each job in a job cost sheet.II June . daily effective working hours. The direct labor cost rate for a cost center is then determined as the annual salary of operators divided by the annual effective working hours. The direct material. Among the respondents in the study. the direct materials consumption will be entered in the material section of the job order cost sheet. and manufacturing overheads. direct labour. direct labor cost and manufacturing overhead cost was entered in the job order cost sheets. Direct Material Costs All the respondents stated that. The Volume .Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 Cost Accumulation Procedures An interview was conducted on the source documents used for cost accumulation purposes. Manufacturing Overhead Manufacturing overhead costs are difficult to trace to each job and are usually predetermined.2012 205 . Production orders are authorized by production managers to carry out jobs according to specific details indicated in the production order.
The General and Administration Expense Rate and the Selling and Distribution Expense Rate are determined by relating the expenses to the total manufacturing costs as follows: General and Administration Expense Rate = Actual General and Administration Expenses of the previous year Total Manufacturing Costs of the previous year Selling and Distribution Expense Rate = Actual Selling and Distribution Expense of the previous year Total Manufacturing Costs of the previous year Volume . planning and marketing research. Issue . Platin. Web. Table 1: Basis used for overhead cost allocation Basis used Direct labor hours Both direct labour and machine hours Total Frequency 91 29 120 Percent 76 24 100 Source: Primary data The survey result indicates that in setting the pre-determined manufacturing overhead rate. Responses were reported in table 1. So that administration expense is charged to a job accordingly. The remaining 76 percent use direct labor hour as a base for setting the predetermined manufacturing overhead rates for all cost centers. The manufacturing overhead cost for a product (job) is then the sum of all the applied factory overhead costs accumulated in the cost centers where the product is processed.II June . administration and manager’s office. General and administration expense rate is the expense of finance. GTO. Speed master. The manufacturing overhead cost applied to jobs is captured (recorded) in the job cost sheet. Selling and distribution expense rate are expenses incurred under commercial department and developed based on the share of manufacturing cost so that it is charged to a job similarly. 24 percent of the printing companies use direct labor hour as a base for setting the predetermined rates for the labor intensive operations (computer and camera cost centers) and use machine hours as a base for the machine intensive operations (Cord.Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 basis used for overhead cost allocation was investigated in one of the questions pertaining to manufacturing overhead.II . The administrative expense rate is developed according to the share of manufacturing cost as a whole.2012 206 . Pre-determined overhead rates differ from cost center to cost center. and Binding cost centers).
Thus. To determine the total direct labor cost incurred on a product.II . Regarding the pricing policy of printing companies. Interviews were made with the marketing managers about the different strategy of setting prices.2012 207 . the required list of materials and the respective quantities are derived by the Estimation Section. Issue . the survey result shows that all of the respondents under study consider each cost component: the material cost of a product. labor cost of a product. On the basis of the specifications or sample. The direct labor cost is charged to each product on a rating basis. the survey result shows that all of the printing companies under study use cost-plus pricing method. The total manufacturing overhead costs applied to a product is determined by summing up each cost center manufacturing overhead cost applied. The direct labor hours of the job order (product) in each cost center are estimated in advance jointly by the Commercial Department and Production department. The approach used by 86 percent of the printing companies under study in setting the selling price is as follows: Direct material cost + Direct Labor cost + Manufacturing over head cost = Total Cost + Profit margin + VAT = Selling price Volume .II June . The direct material cost of a product is estimateed based on the customer specification or sample. The volume of orders also influences prices. All marketing managers used a strategy of setting high prices in the case of security products and lower prices for other products. each cost center direct labor cost is added to arrive at the total direct labor cost of a product. the findings indicate that the pricing policy of printing companies under study has close relation with the product costs. The estimated quantities of materials are multiplied by unit costs given by the Finance Department to determine the material cost. In setting selling prices for products. and overhead cost of a product as per the data provided by the Finance Department.Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 Pricing Policy and System Survey respondents were asked the pricing policy of their companies. Large volumes lead to lower unit prices.
speed master. stitching. the method of setting the selling price of a product is as follows: Direct material cost + Direct Labor cost + Manufacturing over head cost + Selling and distribution expenses + General and Administration expenses = Total Cost + Profit margin + VAT = Selling price Conclusion Costing system is needed to accumulate the costs of goods manufactured.2012 208 . the direct labor cost charged to products consists of the labor of machine operators (computer. Furthermore. quality Volume .Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 14 percent of the sampled printing companies use a different approach in determining the total cost of a product and setting the price.) which can be traced to specific printing products in an economically feasible way. ink. Issue . chemical. GTO. web operators. montage. camera. platine.II . cord. plate. The overhead cost is a summation of the cost of indirect materials (film. Thus. and other supplies). etc. indirect labor (salaries of production manager. Paper and stamp handle constitute the direct materials since the costs of paper and stamp handle are easily and economically identified with the specific products of the printing companies.II June . supervisors. These companies include selling and distribution expense and general and administrative expenses in the total cost of a product using allocation rates. The nature of production activities of printing companies warrants the use of customer order costing system since products are heterogeneous and are based on customer specifications.
P. 4. Pearson Prentice Hall.T. the survey result shows that all of the printing companies under study use cost-plus pricing method. Noreen(2000). that cannot be charged directly to specific printing products. Management Accounting Handbook (pp. C. Reference 1.A. and Brewer. Publications. S. M. and Noreen. P. Kaplan. Industrial Pricing: Theory and Managerial Practice. janitors and maintenance). M. and Gruca. Drury (ed).T.researchjournals. R. 3. (1993). Regarding the pricing policy of printing companies. 1-13). depreciation.Lalithia Rani & Fitsum Kidane . A. An Introduction. R. 12e.2 (2012) : 201-209. Lucey. direct labor and manufacturing overhead costs are accumulated for each job in a job cost sheet. Garrison.. McGraw-Hill.Research Expo International Multidisciplinary Research Journal ISSN : 2250 -1630 controllers. Management accounting: a custom edition.W. R. L. Garrison. Managerial Accounting.>. USA 7. the findings indicate that the pricing policy of printing companies under study has close relation with the product costs. (1999).W.H. NY. T. Drury. Using A Cost Management Approach. McGraw-Hill Irwin.in.N.. Harrison W. Oxford: Buterworth-Heineman. (2003). and Young. E. 9th ed.H. (1993). Cost Accounting: Principles and Practice. Boston. 8. (4th edition). Cost accounting. New York. Arora. MA. Marketing Science. (2005). Atkinson. Prentice-Hall. and all other manufacturing costs such as utility. Costing. 2.II . Fourth edition. 18 (3): 435-454. and Platin. Pearson Custom Publishing.. Inc. D.(2004). Accounting. Please Cite this Article as : D.S. 6.S. Vol.. Managerial accounting. Noreen. New Delhi: Vikas Publishing House. Issue .P.2012 209 . Thus. E. Noble. 5. (2008). Ray H. “A Study on Cost Accounting System And Pricing Policy Of Printing Companies In Ethiopia” Research Expo International Multidisciplinary Research Journal 2. London 9.II June .. Bamber L. Volume . The direct material. <www. insurance etc. 5th edition.. S. Managerial Accounting. Garrison & Eric W. Gayle Rayburn. Camera. Boston. 10. T. MA.(1992). (1999). Horngren C. Common cost centers observed in all printing companies are Computer.M.C.
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