IMPACT OF COST ACCOUNTING INFORMATION

ON PRICE DETERMINATION
Case study of some Nigerian manufacturing
companies

BY

ADAOJI O. RACHAEL
PG/MBA/08/47302

DEPARTMENT OF ACCOUNTANCY
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA
ENUGU CAMPUS

OCTOBER, 2010

1
 IMPACT OF COST ACCOUNTING INFORMATION ON PRICE
DETERMINATION

(Case study of some Nigerian Manufacturing companies)

BY

ADAOJI O. RACHAEL (Mrs.)

PG/MBA/08/47302

Department of accountancy

Faculty of Business Administration

University of Nigeria, Enugu Campus

In partial fulfillment of the requirement for the

award of Masters Degree in Business Administration
Supervisor: DR. (Mrs.) Regina G. Okafor

October 2010

2
 CERTIFICATION

I, Adaoji O. Rachael (Mrs.) have certified that the research has been

approved; having gone through rigorous steps and satisfy the

Department requirements (MBA-Accounting) University of Nigeria,

Enugu Campus for the Award of Degree of Masters in Accountancy.

……………………………………..
Adaoji Rachael O.
PG/MBA/08/47302

........................................ ............................
DR. (Mrs.) Regina G Okafor Date
(Project Supervisor)

............................................ ...............................
Mr. R. O. Ugwoke Date
(Head of Department )

3
 DEDICATION

I dedicate this project to the glory of Almighty God, the Lord of the
universe for giving me the grace and for making it possible for me to
successfully complete this project.

Also to my dear parents Chief & Lolo Nickolas Okafor and my lovely
husband, Mr. Patrick Adaoji, who strived for my great success and
financial support.

4
 ACKNOWLEDGEMENTS

I am grateful to the Almighty God who has given me the

opportunity, strength and inspiration to successfully end this
programme.

I appreciate my husband, Mr. Patrick Adaoji for his moral support

and encouragement towards the completion of this project.

Also, I thank my amiable supervisor, Dr. Regina Okafor (Mrs.) who

made the necessary corrections and approved this project as
successful.

5
 TABLE OF CONTENTS

Page

Title page

Certification---------------------------------------------------------------03

Dedication-----------------------------------------------------------------04

Acknowledgement--------------------------------------------------------05

Table of Contents---------------------------------------------------------06

Abstract -------------------------------------------------------------------07

Chapter One – Introduction---------------------------------------------- 8-17

Chapter Two – Literature Review-----------------------------------------18-51

Chapter Three – Research Methodology---------------------------------52-59

Chapter Four – Data Presentation and Analysis-------------------60-75

Chapter Five – Recommendation, Findings and Conclusion----76-82

References-------------------------------------------------------------83-84

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 ABSTRACT

This research study was conducted to determine the impact of cost

accounting information on price determination in some

manufacturing companies in Nigeria. The objectives of the study

were to determine the components of manufacturing cost

information and also to identify the lapses therein. Literature review

on the topic was aimed at cost determination, cost control concept,

cost performance evaluation, direct and indirect cost and

fixed/variable cost. Data collected were analysed using frequency

table and chi-square. The result of data analysed showed that cost

accounting information contribute a lot on price determination of

products.

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 CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY

The studies of modern cost accounting yield an insight into both the

accountant and management roles in an organization.

Management in most cases wants to know how performance is

measured and often depend on accounting information for guiding

their decisions. Decision making in this context is defined as

making purposeful choosing from among a set of alternative cause

of action in light of some objectives.

Cost accounting has a main purpose of accumulating cost of an

organizational products and services. Managers of manufacturing

companies can use product cost information as a guide in setting

selling prices and for inventory valuation and profit determination.

According to Adeniyi (2000:10), cost control/reduction involves the

predetermination of cost and comparison of predetermination

budgeted or standard cost with the actual cost.

Standard cost which is closely linked with the budgeted is

predetermined per unit cost, usually analyzed into elements: Direct

Material, Direct Labour and Factory overhead. Standard cost is an

8
effective aid to control, due to the link with budget plans and

decision making, because it represents anticipated cost, that is, a

cost which will exist in the future and is likely to be affected by

decisions made by the management.

Carroll (1953), Cost control information always refers to as the

control of expenditures within predetermined levels, which entails

the minimization of resources so as to achieve a given objective.

These controls should be continuous activity aimed at improving

efficiency and quality by ensuring that the right resources are

provided and efficiently used. It is on this basis of this cost

accounting information functions, that, this research is embarked

upon to ascertain to what extent some Nigerian Manufacturing

Companies “Nigerian Breweries plc, Aqua-Rapha Nig. Ltd, and

Anammco Nig. Ltd.” have used this cost accounting information in

the determination of its product prices.

Attempts will also be made in the course of this study to ascertain

whether in practical situations, those techniques in literature

review are operational in some Nigerian manufacturing companies.

The major point is that the focus of a modern cost accounting

9
 information system is on helping manages to deal with both the

immediate and the distant futures.

1.2 STATEMENT OF THE PROBLEM

The private sectors driven economic trend in Nigeria, calls for

serious cost accounting information consciousness among

manufacturing companies. In light of this, manufacturing

companies in Nigeria faced with the task of not only profit

maximization, but a quest for survival amidst competition, legal,

government, economic and environmental constraints.

Moreover, external factors such as inconsistency in fiscal policies do

not lend themselves to be manipulated by manufacturing

companies in Nigeria. Example is deregulation etc, have left

Nigerian Manufacturing Companies with low capacity utilization

with its attendant high cost of fixed overhead per unit production,

high cost (fluctuations) of foreign exchange which causes high cost

of raw materials and plants and machinery.

The effects of high cost of local quality products are that the

consumers boycott these quality products to cheaper one on high

quantity but low quality. These limits the scope of market for these

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manufacturing industries and in the unlikely prospect of export, the

final consequences is rationalization of work force.

Furthermore, nonchalant attitude of many managers or lack of

professional cost accountants to cost accounting information, has

affected the profitability of many Nigeria manufacturing companies,

especially government owned companies. Relevant, reasonable and

unreasonable costs are incurred and charged to profits of the

companies. This affects the growth of the companies, and also

affects their qualities/quantities which are the greatest intents of

the consumers. Other problems are:

(a) To highlight on management inadequate concern over proper

pricing guide through cost information.

(b) To take necessary condition for a costing system.

(c) To evaluate the present state of the application of the cost

accounting information in the determination of prices.

(d) To appropriate basis of preparation of the cost.

(e) To determine problems affecting the effective application of the

cost information in prices determination.

(f) To react to the application.

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 (g) To recommend a more effective and efficient way of applying

cost information.

1.3 OBJECTIVE OF THE STUDY

There is need for management in manufacturing industries to re-

appraise its methods, techniques, procedures adopted and attitude

towards cost information.

This has become necessary given the inflationary trend in the

economy and the resultant passing of manufacturing cost of

products. Whether incurred recklessly or otherwise to the

consumers.

The underlying objectives also compelled the researcher:

a. To identify the standard components of manufacturing cost

information.

b. To examine and compare the cost accounting information

system used by Nigerian manufacturing companies, like

Nigerian Brewery Plc, Aqua-Rapha Nig. Ltd and Anammco Nig.

Ltd.

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 c. To identify lapses in cost accounting information system and

price determination of products and remedial solutions.

d. To determine an appropriate condition and environment for

proper comparison and analysis of costs.

1.4 HYPOTHESES

(i) The cost accounting information on price determination

techniques assists in price control.

(ii) The cost information on price determination techniques do not

assist in price control.

1.5 SIGNIFICANCE OF THE STUDY

It is expected that findings from this study will help manufacturing

companies in Nigeria to see areas of shortfall and remedial

solutions. Managers of such firms will benefits from the study as

they will be made more on cost information system and price

determinations of products.

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 It is hoped that by improving the profitability of these firms this

study will benefit the economy as a whole.

Following the completion of this work, and the result made

available to them, the processors will be in a position to re-examine

their cost accounting information and price determination

techniques and update them so as to enjoy these benefits available

to firms with good cost accounting and price determination

techniques.

With adequate application of good cost accounting information and

price determination techniques, the firms will expand and

consumers will enjoy value for quality products.

Finally, the company’s expansion will improve economy of

employment opportunities and this study will help to highlight the

problems of manufacturing companies.

1.6 SCOPE OF THE STUDY

This study restricted to the cost accounting information as it affects

some Nigerian manufacturing companies and it’s utilization in price

determination of products.

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 This research is divided into five chapters. The first chapter is the

introductory aspect of the study. Second chapter deals on an

overview of cost accounting information and its application in the

determination of products prices in some Nigerian manufacturing

companies. In this overview from allocation for planning and

controlling of costs to the establishment of standard system for

price determination has been treated in detail.

Furthermore, budgetary control and variance have only be defined

and related cost control as they affect it. Chapter three discuss the

methodology used in this project research. Chapter four deals with

the presentation and analysis of data observations while the final

chapter five deals on recommendations, findings and conclusion of

this research study.

1.7 LIMITATION OF THE STUDY

The following three factors posed problems to the research and they

are:

i. Environmental Factors: This research needs facts and

figures as inputs, however, the manufacturing companies

15
 are skeptical in releasing information on sensitive areas of

its production, cost accounting information and price

determination techniques.

ii. Finance: Inadequate finance affects data collection,

frequent visits to the companies and other relevant source

of information.

iii. Time limit: As a part-time student the researcher had time

constraint due to employment schedules, academic work and

series of appointment with the managements of some of

manufacturing companies under review.

1.8 DEFINITION OF TERMS

Cost Accounting: Horngren (1990); This is the process of

identifying, analyzing, computing and reporting cost

information to the management. Cost accounting information

provided data for:-

Planning and controlling routine operations

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 Non-routine decisions, policy making and long range

planning for inventory valuation and income

determination.

Budgeted Cost: This is an information system through which

cost can be estimated and controlled. Management most often

base its price policy on budget cost or estimated price through

observed trends in economic activities.

Indirect costs: These are element of cost that are associated

with or caused by two or more cost objectives jointly, but that

are not directly traceable to each of them individually. Its

nature is that cost that is not possible or at least not feasible,

to measure directly how much of the cost is attributable to a

single cost objective.

Cost Analysis: This is the process of classifying and

estimating the total amount of expenditure to be incurred in

the course of manufacturing a product or rendering a service.

Cost Control: This is the control of expenditure within

predetermined levels. It is concerned with understanding how

17
and why costs change setting of performance standard and

monitoring of actual results against these standards.

Standard Costing: This is the process of estimating the total cost

of production per unit. It represents an estimate or pre-determined

total cost of products per unit for an organization standard costing

help to build budgets, obtains product price and save book-keeping

costs, Brown (1975).

Variance Analysis: This is the difference between the standard

cost of production and the actual cost of production. Its process of

classification into sub-variances is term variance analysis.

Budgetary Control: This is a system of accounting in which cost

and revenue are analyzed in accordance with areas of personal

responsibilities so that the performance of the budget holders can

be monitored.

Cost Reduction: This is reduction in unit cost of goods and

services without in pairing suitability for the use intended.

Efficiency: The efficiency of management affects the cost if its

products. Efficiency can result from proper control of the

enterprises activities and adequate work supervision.

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 CHAPTER TWO

LITERATURE REVIEW

Cost accounting information and price determination comprises

cost information system which shows management the total cost

accumulated in the production of goods and services and

subsequent product pricing policy decisions. Since we are dealing

with the impact of cost and its effects on product price, we shall not

review both foreign related literature and local related one so

independently.

The task of providing cost information to management, involves the

following:

2.1.0 COST DETERMINATION

This is very important in financial reporting as regards to cost of

inventories, cost of goods as well as management functions. The

19
actual cost data form a basic input to the control process and

planning decisions.

2.1.1 COST CONTROL CONCEPT

Control ordinary connotes the regulation of one or more

organizational activity in such a way as to facilitate goal attainment.

Control is important to all organizations. It helps the organization

respond to changing condition, prevent the compounding of errors,

cope with organisational complexity and minimizes cost.

The achievement of the profit objective will not be possible if a

manufacturing company can go on to inure costs without effective

control.

Efficient and effective cost control is a major determinant for the

achievement of profit objective of firms. Cost control implies the

maintainace of cost within predetermined employed, the problems of

cost control tend to be greatly simplified.

Batty (1970) state that the concept of cost control refers to the most

economic use of labour, materials, services and fixed assets. In order

to survive and earn adequate return on capital employed, Bathy

20
(1970) insisted that it is essential to aim at minimum cost and

maximum quality bearing in mind the price to be charge. Cost control

is an essential part of management. There should be a forecast

planning followed by execution of the plans. These should be

measured at all stages, a comparison between actual and standard

costs should be made so as to evoke corrective action necessary on

any adverse variance. Its cost control is to be effective; there should

be a systematic approach.

Managers, supervisors and other heads of cost centers must

understand that they are accountable for costs which are incurred as

a result of their operating decisions. Each employee in the chain of

command should understand the role to play.

Horgren (1990) stated in his cost accounting text book that: “Few

costs are clearly under the sole influence of one manager. For

example, price of direct material may be influence by a purchasing

manager, where as quantities used may be influenced by a production

manager.

Furthermore, Paige (1997) affirms that although all members of staff

should be cost and control conscious, some members of the staff have
21
the further responsibility of ensuring that cost control systems are

implemented. Writing on the implementation of cost control, he has

this contribution to make: “Managers and their assistance have the

responsibility for the actions of the employees under them and are

also expected to account for the profitability and effectiveness of areas

under their control. Head of Department are also responsible for the

staff efficiency and profitability of their Departments, control clerks,

store-keepers, stock controllers, accounts personnel, cash handlers

and other operational staff are expected to observe all cost control

measures and devices and always be cost conscious in all their

operational dealings.

It is therefore, reasonable to agree that cost control is necessary in

the operation of manufacturing firms and other production industries

where waste and pilferages are common.

Akano (1981) has described cost control as the prevention of waste

within the existing environment in an organization, and procedure

whereby actual results are compared against predetermined

standards, so that waste can be measured by appropriate and

22
corrective actions. It therefore means that before a firm can control

cost, it must predetermine what it want to achieved and what that

achievement is likely to cost. Subsequently, actual cost must be

ascertained and actual performance evaluated. These are then,

compared with the predetermined levels and any abnormal increases

in cost beyond the anticipated should be analyzed.

Steps involved in the control of cost become discernable:-

(a) Establishment of operating standards: This involves the use of

standard costing and budgeting.

(b) Measurement of performances.

(c) Comparing performance and taking of action. After this step the

management can undertake any of the following measures:

• Maintain the status quo

• Correct the deviation

• Change standards

2.2.2 PERFORMANCE EVALUATION

The organizational management should have the following thoughts

before evaluating the systems performance:

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 a. How properties are the assets being managed, that is, is the

firm being managed in line with a view to achieve its

objectives?

b. How is the management handling the problem of ‘how best to

achieve the goals of the firm at the minimum cost?

c. How is the corporate, divisional as well as individual? In

performance evaluation, opportunities should be allowed for

rewards and sanctions, in other to achieve the corporate goals

of the organization. Also there should be appropriate changes

from time to time; improvements, promotions and demotions

recommendations.

d. How effective is the internal control system of the firm? That

is, to say any firm where efficient and effective internal control

systems like, corporate, divisional and individual

performances are property evaluated, cost will be possibly

controlled.

2.2.3 DIRECT AND INDIRECT COST

Direct Cost: Certain costs are incurred for specific purposes and can

be easily identified with specific departments, products or processes.

24
These are known as direct overheads costs. The direct overhead costs

are broken into direct labour and direct material. The cost of direct

material for making a woolen sweater for instance, would be the cost

of the wool yarn, while the cost of direct labour would be the wages.

These costs can be specifically identified with production of the

sweater.

Indirect Costs: these are costs that cannot be easily identified with a

product or production process. The cost of heating the factory

building would be regarded as indirect costs. Even such cost as the

glue for the holding the products together may be classified as an

indirect costs, not because it could not be identified with a specific

product but because it cannot be easily identified. The materiality of

the item should be taken into consideration. A physical component of

the product being made, may have a small unit value and the cost of

treating them as a direct cost may be excessive when compared with

the benefit gained.

The borderline between direct and indirect costs often depends on

the frame of reference. The salary of a foreman may be a direct cost

of the plant and may be directly identified with a specific

department, but if that department produces several products, the

25
 salary of the foreman will be an indirect cost when we are interested

in determining the cost of each product.

For decision making purposes, the accountant’s classification of

direct and indirect cost is not very useful. An indirect cost may be

just as relevant as a direct cost in making a decision. The indirect

cost may be variable and out of pocket expenses or a fixed cost and

sunk cost, e.g. building depreciation. Thus, to describe a cost as

being indirect cost tells little about that cost and we have to know

that it cannot be directly or readily identified with the end product

or particular department.

2.2.4 FIXED AND VARIABLE COSTS

Costs vary with changes in volume activities. For decision making

purposes, this is one of the most useful classification of costs. Product

pricing and level of production decisions are to some extent based on

the information supplied by this cost classification. The ability to

control cost also relies upon knowledge of how the cost should react to

changes in the level of production.

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Variable manufacturing costs are those ones that varies in total amount

directly with production. If production increases by 15%, then, the total

variable cost will increase by 15% too. The examples of variable

manufacturing cost are direct labour, direct material and power

necessary to run the machines. Under certain conditions even some of

these costs might not be purely variable. Example, direct labour

workers may not be laid off immediately, if production slacks.

Fixed manufacturing costs are those costs that are constant in total

amount over various ranges of production. The plant managers’ salary

is fixed, as is the depreciation of the factory building. Fixed costs are

fixed relative to the level of production, but they may change from

period to period. For example, salary increase may be given to foremen,

if production continues to increase, so that one factory building is

inadequate, a second factory building may be built and the depreciation

of this second building is also a fixed cost. Thus, although depreciation

expenses of factory building are considered to be a fixed cost, it too may

increase if production passes a certain point and more depreciation

assets are required.

27
The cost per unit is constant, if the cost is variable assuming constant

efficiency with fixed cost. The cost per unit decreases as more units are

produced. With fixed cost of N25,000:00, the fixed cost is N10,000 if two

units only are produced and N3:00 per unit of 45000 units are

produced.

The above explanations is to say that variable costs are those costs

which change in direct proportion to the changes in production

activities and tend to increase in total as production levels decreases.

While the fixed costs are those that are not affected by changes in the

volume quantity of production; but known as constant capacity or

unavoidable cost.

FUNCTIONAL AND NATURAL CLASSIFICATION OF COSTS

The natural classification can be divided into direct and indirect labour,

and then further classified by the exact nature of the labour. Examples

are material supplies taxes and depreciation.

The functional cost classifications are selling and administrative cost as

well as manufacturing costs. The expenses on the income statement can

be classified by their natural or functional classification. Below are

28
classes cost of that are not used for recording purposes but are

commonly used for decision making. The list is by no means all

inclusive but it does give an indication of various ways in which cost

may be classified for decision making purposes and cost that are

relevant for some decisions may not be relevant for others.

2:3:0 COST ACCOUNTING SYSTEMS

There are numerous control systems available in an organization, such

as product control, quality control and inventory control and the cost

accounting system. Of all these cost accounting system is the most

vital. It is a financial control system that monitors the results of all

activities and all other control systems. It identifies monitors and

communicates costing information to the management accountant, for

his planning and controlling function.

Cost accounting system of any organization is the foundation of the

internal financial information system as stated by lucy(1988).

Management need a variety of information to plan, control and makes

decisions. Information’s regarding the financial aspect of performance is

providing by the costing system. Lucy (1988) pg.1, gave the following

examples of the instruction provided by typical costing system and its

usage in table form:

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Table:1: Costing System and Usages

Information Provided by Possible usages by the

Costing System Management

Cost per unit of production or As a factor in pricing decision,

1 for a process planning and cost controls

Cost of running as section, Organizational planning cost or

2 department factory control

Wage costs for a unit of

production or per unit of An alternative methods, production
3 production planning

Cost behavior with varying levels Profit planning, make or by

4 of activity decisions, cost control.
Source: cost accounting analysis and control

It is doubtful whether a business of any size can survive in the

intensely competitive system of cost accounting, as stated by (Allen

and Harold 1978.)

Furthermore, Armond (1984) agreed that the underlying

principles, conventions and objectives of all costing system are the

same, but the application of these principles and the methods by

which the objectives are to be achieved must vary with

circumstances. This does not however, that the processes and

30
 procedures of a business must remain unaffected by the

introduction of a system of cost accounting.

The preliminary investigation, which must be made before a

system is installed will often disclose weakness and inefficiencies if

the costing records of the records are to be accurate, a system of

material, ways and production control is essential. Assuming that

the organization is reasonably satisfactory, the system of costing

should be practical, i.e. it must be designed to suit the business.

There must be no attempts to make the business suit the system.

According to Batty (1979), cost of the costing system must be

considered in relation to the size of the business and the benefits

to be obtained. The system must not be over-elaborated, but in

considering its cost, the savings which should accrue through the

control of materials, labour and production overhead, which the

system affords, should be bone in mind. In this regards, the

following questions becomes essential in assessing the reliability of

costing system:-

(a) Is the costing system appropriate to the organization and the

manufacturing process?

31
(b) Do the reports, statements and analyses produced by the

costing system contain the relevant information for the

intended purpose?

(c) Are the reports and statements produced at appropriate

interval and early enough to be affected?

(d) Are they addressed to the person responsible for

planning/decision making or control?

(e) Is the information produced in a relevant form and to

sufficient degree of accuracy for the intended purpose?

2.3.1 PRODUCTION COST COMPONENTS

Production is the creation of goods and services to satisfy human

want. This definition shows that production is the combination of

man, material and machine in an efficient manner to generate a

product or services that can satisfy human wants.

According to Ronald (1978) cost of production can be classified

according to components in the manufacturing process. In his view,

every factory cost is categories as:-

1. Raw material cost: These are the cost of raw materials and

supplies used directly in manufacturing a product. Raw

material costs are also classified as variable cost because the

32
 total cost of raw materials tends to increase as number of

products manufactured increases.

2. Factory overheads cost: This category of production include,

all other factory costs besides raw material and direct labour.

Factory overheads cost can be variable such as certain

supplies for maintenance of the machines and certain power

costs. It can also be fixed, such as depreciation and machines,

buildings, insurance and taxes. This three-part classification

of production costs help managers to record and control

departmental operations. In any type of manufacturing

concern the above basic components must be present.

3. Direct labour cost: This cost is part of the cost that is related

to labour force in a factory, those costs involved directly in the

manufacturing of the product. The direct labour costs are also

variable costs in that, these costs in total increase directly as

production level increases.

2.4.0 THE FLOW OF COST IN MOST MANUFACTURING COMPANIES

Most of the manufacturing managers are interested in the cost of

raw material, the goods in process and the purchasing cost of

33
materials as well as by the various processing costs that are

incurred in production processes. Examples of this is that,

manufacturing cost generally, assigned to inventory are factory

labour, depreciation of factory building, material and the cost of

various service departments.

In addition to the cost of the material purchased to make the

product, it is necessary to identify the labour cost and the indirect

costs, such as heat, light and rent on the factory building. All these

costs must be incurred to make the product, and the calculation of

the product cost would not be correct if these costs were not

considered.

Costs are accumulated and identified as to their basic nature and

then assigned to products costs flow through accounts paralleling

plant.

2.4.1 WORK IN PROCESS IN MANUFACTURING COMPANIES

The costs associated with goods still in the products process are

recorded in the work-in-process accounts. The number of account

used will vary. There may be only one account but if more common

to have at least three:

34
 Direct labour-in-process

Direct material-in-process

Manufacturing overhead-in-process

Production costs: These are assigned to inventory accounts. The

costs associated with production of products are once not

recognized as express until the goods are sold. The objective is to

match the expenses of earning the sales revenue against revenue to

compute the income of the period. The production overhead

(indirect manufacturing cost) is transferred to work-in-process,

based on the overhead absorption rate. The direct labour is

recorded in the work-in-process as the necessary information is

obtained from labour reports. The type of information that has to be

known are the departments, the job order number, the process or

product being worked on the number of hours, and type of work

performed the hours of overtime and the hourly rate. The transfer of

material to work-in-process is accomplished through a summary of

material and gives the number of physical unit, unit price, a total

value and the department. Job process or product s receives the

material.

35
2.4.2 TRANSFER OF FINISHED GOODS IN MANUFACTURING

COMPANIES

As the goods are completed and come off the production line, they

become the basis of the entry transferring work-in-process to

finished goods. It should be noted that the accounting entries

follows the physical flow of materials and other cost through the

production process. Assume that production Accounts represent

the cost of finished and unfinished products. The cost of 20000

units in ending work-in-process inventory is N140,000 ( the cost of

each finished unit is N1:00). The following entry is made to transfer

the N20,000 cost of the finished units from work-in-process to

finished goods account.

After recording this entry, there is a balance of N60,000 remaining

in the work-in-process account. This is the cost of the partially

competed units that are still in process. The cost of these units is

shown in a separate inventory element.

2.4.3 COST OF SALES TRANSFER IN MANUFACTURING COMPANIES

When the goods are transported to customers, their costs are

transferred from finished goods to cost of goods sold account.

36
There are certain considerations for all costs incurred in the

manufacturing process as expenses. As the manufacturing costs

are incurred, they are not considered to be expenses of the period

but, rather costs of making the product. The cost factors are also

considered to be inventories from an accounting point of view.

When the product is completed, the costs are transferred from one

inventory account (work-in-process) to another inventory account

(finished goods). It is not complete until the product is transported

in connection with sales and then the firm will have a decrease in

its resources. The entry debiting the cost of goods sold and crediting

finished goods are made to record the expenses and the decrease in

inventory. For example; assume a company sells 1,000,000 units of

its product during the year. The following entries recognize the cost

of goods sold for the year, and the corresponding decrease in

inventory.

2.5.0 DETERMINING THE COST STRUCTURE OF A FIRM FOR

PRICING PURPOSES
Entrepreneurs and business organizations have, for long been

aware that pricing of a product is one of the most important and

complicated problems which they have to face. In attempting to

37
resolve this problem and in trying to find some general guidelines

by which to establish a sound pricing policy, they are in agreement

that cost is one of the factors which must be taken into account.

Cost as an input to the pricing decision which is the major discuss

of this research constitutes what is referred to as “cost structure of

the firm”, conclusive data as to costs are often arrived at with great

difficulty and sometimes not at all.

One useful way of studying cost for the pricing decision is to

classify each category of cost as to its fixed and variable characters.

In respect to pricing strategy generally, it is useful to consider three

measures of the cost structure of the firm:

(a) The ratio of fixed to variable cost.

(b) The economies of scale that may be available to a firm.

(c) Cost of a firm relative to its competitors.

The ratio of fixed variable costs: When a company is operating with

very high fixed costs and low variable costs, such as an oil refinery

operating below capacity, the incremental cost of additional input is

very low. Under such circumstances, earning may be greatly

38
enhanced if volume is increased by some moderate reduction in

selling prices. Such industries have been termed volume sensitive.

Alternatively, a company may be operating with very high variable

costs and very low fixed costs. Since raw material and labour costs

are such a high percentage of sales, there are no windfall gains to

realize through increasing output, particularly if the contrary

earning would be improved most dramatically if selling prices were

raised even if there was some contradiction in the volume of output,

such industries have been termed price sensitive.

A part from pricing policy under review, it is important to make the

decision with some knowledge of the possible outcome. Only

through measurement of the quantities expected at different prices

and the effect of different quantities on production and marketing

cost can intelligent price decision be made.

This is where the need for a rationale method of collecting all efforts

dissipated (input) in every face of organization in order to bring

about the product (output) is needed. So that, whatever policy is

adapted should be based on awareness of the enterprise expected

39
objectives. A practical demonstration of cost information is shown

in a table below.

In order to show clearly, how valuable the presentation of costs

accounting information may be the following illustration:-

Table: 2:

ABC COMPANY & CO.

COMPUTATATION OF COST INFORMATION STATEMENT

N N
Material consumed 140,000.00 Sales 220,000.00
Wages 60,000.00
Production expenses 20,000.00
Gross profit (25%) 220,000.00 220,000.00
Gross profit
Admin. Expenses 6,000.00 (25%) 55,000.00
selling & distribution 5,000.00
Net profit 44,000.00
55,000.00 55,000.00

This statement reveals an apparently satisfactory net profit of

N44,000:00 which represent 9% of turnover.

However, the information is too general to be great use to

management, who need to know the profit or loss on each product,

so that policy decisions can be made.

40
The allocation of costs to each product is one of the main functions

of cost accounting system, so that reasonably reliable production

costs can be ascertained. The cost accountants simple cost

statement is given in a table below which may help the

management to trace the poor performance of the firm to the

particular department responsible.

ABC COMPANY & CO.

Table: 3: COMPUTATATION OF COST STATEMENT

A B C TOTAL
N N N N
Material
consumed 4,800.00 3,700.00 6,500.00 15,000.00
Wages 1,500.00 2,500.00 3,000.00 7,000.00
Production
expenses 500 600 900 2,000.00
6,800.0
6,800.00 0 10,400.00 24,000.00
Admin.
Expenses 700 800 500 2,000.00
Selling &
distribution 300 400 300 1,000.00
8,000.0
TOTAL COST 7,800.00 0 11,200.00 27,000.00
10,240.0
SALES 0 10800 8,960.00 30,000.00
2,800.0
PROFIT & LOSS 2,440.00 0 -2,240.00 3,000.00

PROFIT 24% 26% - 10%

41
 This statement clearly reveals to management that product “A” and

“B” are approximately 25% profit, while that of product “C” is

pulling down the total profit to an average of 10%, ignoring such

items as plant utilization, plant capacity, volume of sales etc. there

are four possible courses which management may follow:-

Investigate thoroughly product/department “C” to find

possible economies.

Stop production of product “C”

Increase selling price of product “C”

Product “C” as a loss-leader.

2.5.1 PROCESS AND PRODUCT COSTING

Process costing is a system for applying costs to like products that are

mass produced in continuous fashion through series of production

processes.

The purpose of cost accounting system is to accumulate the cost of a

firm’s product and services, and this is called Product Costing. This

42
helps managers to guide the setting of selling prices and for inventory

valuation. The different procedures may not be detailed in this study.

2.6.0 THEORETICAL WORK ON COST AND PRICING

A natural consequence of freedom is specialization in productive effort. The

point is developed thus far that whenever specialized exists, exchange are

essential to enable the members of the society to satisfy their wants in

varying degrees. It is within the process of exchange that value is created.

Price is a monetary expression of value and is the focal point of the entire

exchange process.

Pricing policies must deal with varied competitive situation. The type of

policy is dependent upon the environment within which the pricing

decision must be made. The type of policies considered mostly in this work

are those affecting manufacturing industries.

Pricing objectives must be translated into pricing decisions. Traditionally,

the accounting functions played the dominant role in pricing, particularly

in manufacturing industries. The accountant set the prices while the sales

force administers them.

There were several reasons for these traditional organizations, since

prices were often based upon costs; the accounting function controlled

43
the data considered relevant to pricing decision. The cost plus approach

allowed some type of business, such as job order shops to relegate

pricing to a clerical task.

Finally, the marketing function, prior to the advent of the marketing

concept, was sales oriented. The most parts of the marketer were

more than willing to let the accountants set price levels as far as

marketing administered discounts and the like. Most companies

feel that marketing is better situated to handle this activity. In

addition, the developments of information system allow marketing

better access to sales and cost information. Although, the

marketing function has usually assumed pricing responsibility, the

principal price setter may vary from company to company.

2.6.1 PRICE FLEXIBILTY

Marketing executives must also determine company policy with

respect to flexibility pricing. Is the firm going to have just one price

or pursue a variable price policy in the market? As a generalization,

one price policy characterize situations where mass selling is

employed, while variable pricing is more common where individual

bargaining typifies market transactions.

44
2.7.0 PRICING PROBLEM

The problem with pricing system is much more complex than

simply estimating total cost per unit. The firm cost structure in the

short term will determine whether a given price will produce a profit

or loss on each unit sold, but the total may equally well be affected

by changes in consumer demand and the firm’s environment.

Indeed, competition and economic policies which affect the level of

aggregate demand are frequently more significant to the pricing

decision than the firm’s total unit costs.

2.7.1 LIMITATIONS OF PRODUCT PRICING

The incremental method eliminates one of the problems associated

with full cost pricing it fails to deal effectively with the basic

malady. Cost pricing does not adequately account for product

demand. The problem of demand estimations is as critical to these

approaches as is to classical price theory. To the marketer, the

challenge is to find some way of introducing demand analysis into

cost-plus pricing.

45
The following has also been pointed out. A well reasoned approach

to pricing is in effect a comparison of the impact of a decision on

total sales, receipts, or revenue and on total costs. It involves the

increase or decrease in revenue and cost, not just for the product

under consideration but of the business enterprise as a whole.

From what has been written and reasoned by different authors, we

can conclude that the issue of pricing is not a simple task but,

rather it has received less attention in comparison with the actual

complex work.

According to Louis E. Boom, in his book, “The pricing policy” is one

of these gray areas in marketing management where the participants

struggle to develop a theory, policy procedure, technology or rule of

thumb on which they can depend”. Pricing remains a complex

variable because it has both artistic and scientific aspects; it is at

the same time both objective and subjective. It is one area where

exact decision tool and executive judgment meet.

2.7.2 COST BASED PRICING THEORIES

Pricing a product is one of the most important and complicated

problems which face entrepreneur and business firms. In trying to

46
solve these problems and in attempting to find some general

guidelines by which to establish a sound pricing policy they are in

agreement that cost is one of the factors which must be taken into

account. Consistently selling below full costs will lead to winding-

up, whereas if the firm is to survive, it must try to sell at prices

which will not only cover costs but, yield a sufficient profit. No hard

and fast rule may be laid down since each firm’s product and

market situations have features which themselves may be unique.

The influence of cost on pricing decision varies according to

circumstances. Where firms are under contract to supply on a cost

plus basis, their cost are all important in deciding the contract

price. In other situation for example, a liquidation sale; cost are

irrelevant because, that price of which the goods are sold are not

related to their costs. Normally the importance of the firm costs lies

somewhere, between these two extremes.

The relevance of cost to pricing decision is influenced also by the

firms drive to meet certain objectives, for instance, earning a higher

rate to return, increasing its share of the market or penetrating a

new market may be a more dominant influence on pricing than its

47
costs. Thus, a firm may be so strong as to be a price maker, so that

it is able to fix a price which other producers will have to follow.

Conversely, a firm may be a price-taker, that is, its position in the

market is so weak that it cannot influence the price.

In general, cost based pricing theories are concerned with two

elements of price:

(a) The first is the relevant cost which should be included in the

price

(b) The second is the profit margin which must be added to reach

the prices.

2.8.0 LEGAL IMPLICATIONS OF PRICE DETERMINATION

In addition to consideration of the relationship between costs and

demand, the price maker is confronted with another external

variable, the legal frame work. The legal influences are of two

types:-

(a) Statutory law

(b) Governmental intervention

48
With respect to statutory law, there is only one law which is of

concern and it does not apply to the price determination practices

of manufacturing. Rather it governs the pricing practices of

intermediaries.

2.8.1 PRICE TO ACHIEVE CORPORATE

The objective of products price established should paralleled the

objective of the firm. The aims of the firm however are not always

internally consistent and close inspectional may show them to be

very much in conflict. For instance, there may be a conflict between

the desire for short run profitability and the desire to gain prestige

by being the biggest firm in the area. It is through a review of

corporate objectives that specific pricing policies are developed. To

say that the only objective of the price determination is to maximize

profit is to over simplify the problem. Obviously, profits are

measures of success and are important for survival. The

refinements introduced by stating long run profitability as a goal

may be a very logical and meritorious objective, but, it is of limited

49
value in guiding the determiner of prices. Pricing policed must be

more specific and give direction to decision making.

Some of the most common polices related to price determination

are:-

(a) Return on Investment Pricing: This requires that the price

determiner calculates the returns available at different prices

and quantities. He will select that price which most nearly

approximates the return desired.

(b) Penetration Prices: This is closely related to overall corporate

objective of growth. Under such a policy, the price which maximizes

profit would not be selected. Rather a price which maximizes

quantity at a satisfactory profit level would be chosen. It is selected

on the assumption that it would enable the company to penetrate

certain markets, win customer loyalty, limit new firm entering and

generate long run profitability for the firm. A penetration policy is

generally analogous to a low price policy product.

(c) Selecting Pricing: This involves those potential customers that are

not adversely influenced by high price is the target of this pricing

policy. It is generally followed where no entrants are expected to

follow and to enable a recoupment of investment as fast as

50
 possible. It results in a price at which profits are maximized and

contributes to short run profitability.

(d) Competitive Structure of the Firm: A very fundamental step in

pricing analysis and policy making is to recognize the facts

concerning the competitive structure of industries. Economists

have identified at least three structural categories that are of some

assistance to the decision maker:-

Industries with a large number of competitors

Industries with competition among the few companies.

Monopolistic: industries with only a single firm.

Where there are many competitors selling undifferentiated products, it is

almost inevitable that price competition will be fierce and that marketer

will have little discretionary power to influence the prices are which they

sell. Under such circumstances, the marketer has no option but to

accept the market price as given, such marketers may be termed “Price

Takers”.

At the other extreme are those marketer with complete discretionary

powered to establish their own selling prices, designed as “Price Makers”.

Between the extreme rampant price competition and complete absence of

competition are common found situations where there are relatively few

competitors such as in steel industries. In such circumstances, the

51
phenomenon price leadership frequently emerges, wherein one or two of

the leading firms act as bell weathers for the industry group as a whole.

In addition to appraising, the existing number of competitors in the

industry, the marketing manager must also appraise the potential

entrants into the industry before establishing a price policy. Thus, the

pricing decision maker should recognized that the number of prospective

as well as existing firms in an industry has a fundamental impact on the

degree to which a firm has the discretionary influence over its own selling

prices.

(e) Price Sensitivity of Total Industry Demand: Another key variable

in pricing decisions is the price sensitivity of total demand for the

product of an industry, that is, industrial demand. If the average

selling price in the industry is reduced, will there be a large

expansion of demand for the product? If demand increases a great

deal when prices are lowered, then demand is said to be highly

elastic, conversely. If demand is little affected by price it is said to

be inelastic.

The price sensitivity of industry demand may be influenced by several

factors including the following:
The importance of the products to the consumers.

There perceived saturation of the need for the product

The existence of substitute products for this product

52
 Whether or not it is a derived demand situation.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 INTRODUCTION

This research relates to the impact of cost accounting information

and price determination in some manufacturing companies in

Nigeria. Research methodology used by various researchers vary

according to the nature and scope of investigation and that prompt

an individual researchers to describe procedure adopted and

research technique used to validate the observation and

conclusions made from such facts.

Accounting research demands practical approach in order to be

efficient and effective. To achieve this, the researcher took time to

formulate a practical research design which will facilitate the

collection and analysis of data in the most practical way.

3.1 POPULATION

This could be a group of persons, animals, companies etc.

According Nwoko and Olantian (1988), Population of a study

53
represents the target of the study as defined by the aims and

objectives of the study.

Also research population is an entire group of people, objects or

events, all having a least one characteristic in common, as stated by

Jacob (1976).

The population of this study is categorized into some of Nigerian

Manufacturing Companies, like; Nigerian Brewery Plc, Anammco

Nig. Ltd. and AquaRapha Nig. Ltd. And it spread in these

Departments:-

- Personnel/Administration

- Accounts/Finance

- Production/Purchasing

- Marketing/sales

The population consists of thirty (30) workers. Ten (10) from each

Company mentioned.

The population distributed is presented in table below:-

54
Table: 3.1 DISTRIBUTION OF POPULATION
OPERATIONAL
S/N DEPARTMENTS NO OF WORKERS TOTAL
AQUA
RAPHA
ANAMMCO NBL. Nig.
Nig. Ltd. Plc. Ltd.

1 Personnel/Administration 6 6 6 18
2 Accounts/Finance 6 6 6 18

3 Production/Purchasing 12 12 12 36
4 Marketing/Sales 6 6 6 18
TOTAL 30 30 30 90

SOURCE: NBL. PLC., ANAMMCO NIG. LTD; AQUA-RAPHA NIG. LTD.

3.2 SAMPLE

The sample consists of 23 staff drawn from each of the above

mentioned companies.

The sample for this is; N = n

1 + n (e)2

where: n = the sample size

N = the population size

e = the total error which can result by using the

samples from the firms.

55
Using the above stated data’s

NBL PLC. ANAMMCO LTD. AQUARAPHA LTD.

n=? n=? n=?

N=30 N=30 N=30

e = 10% e = 10% e = 10%

n=30 n=30 n=30

1 + 30(.10)2 1+30(.10)2 1+30(.10)2

Sample size =23 sample size =23 sample size =23

DISTRIBUTION OF QUESTIONNAIRE TO THE COMPANIES

Allocated proportion formula:

Nh = n x nh
N 1
Where: Nh = Allocated proportion

N = Number of responses according to departments.

Nh = sample size

N = Total number

56
Table:3:2 Data Analysis
ANAMMCO AQUA RAPHA
NIG.LTD. NBL. PLC. NIG. LTD
Personnel/Administration 6/30 x 23/1 6/30 x 23/1 6/30 x 23/1
1
Sample size 4.6 4.6 4.6

Accounts/Finance 6/30 x 23/1 6/30 x 23/1 6/30 x 23/1

2
Sample size 4.6 4.6 4.6

Production/Purchasing 12/30x 23/1 12/30x 23/1 12/30 x 23/1

3
Sample size 9.2 9.2 9.2

Marketing/Sales 6/30 x 23/1 6/30 x 23/1 6/30 x 23/1

4
Sample size 4.6 4.6 4.6

3.3.0 SOURCES OF DATA

In a research of this nature, attempts are made at disclosing

the sources of the writer’s information. These sources are

principally the primary and secondary sources.

3.3.1 PRIMARY SOURCE OF DATA

The data needed for the study were gathered through oral

interviews and distribution of questionnaires. Preliminary

studies revealed that matters relating to cost control and price

determinations are usually handled by the Accounts,

57
Production, Marketing/Sales, and Personnel Departments.

Accordingly, the researcher had to work with these

departments and questionnaires were distributed to the staff of

the mixture of open ended and a structured questioned. Also a

complementary tool such as series of personal interviews were

conducted with the Accounts/Finance, Production, Marketing

and Personnel staff so as to consolidate and supplement the

information gathered through questionnaire distribution.

3.3.2 SECONDARY SOURCE DATA

The secondary data were solely gathered through reading of

different accounting text books of the past researchers.

The other sources wee newspapers, bulletins, journals,

conference presentations and online journals.

These were also drawn from published report of the companies

accounting records from internets. All these helped greatly in

this study.

58
3.4.0 STATISTICAL TOOLS

Testing of hypothesis was done, using the chi-square (x2) test.

The chi-square (x2) test is an important extension of

hypothesis testing and is used when it is wishes to compare

actual or expected distribution. It is often referred to as

goodness of fit test. The formula for the calculation of chi-

square (x2) is as follows:

X2 = e(0 – e)2

Where: 0 = the observed frequency of any value

e = is the expected frequency of any value

To use the chi-square (x2) test tables are made use of. The

observed frequency of the responses to the questionnaire

questions (O1) will be represented by the total in the table. The

expected frequency (E1) is gathered by using the formula:

E = nR x Nc
N

Where; nr = number of row

Nc = number of columns
59
 N = sample size that is total number of responses

The decision criteria or rule is used to be able to get the

findings from the hypothesis testing.

Accept Ho where X2 <U, otherwise Reject Ho where X2 > U

Here, x2 = observe chi-square value which is derived from

X2 U = E(0-F)2

Where: U = critical chi-square value derived from the chi-

square table.

To determine the degree of freedom used;

(R - 1) (C – 1)

where: R = number of Rows

C = number of columns
.

60
 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

This research is aimed at finding out the extent of application of

cost accounting information in the determination of product prices

in Nigerian Manufacturing Companies like: Nigerian Brewery Plc.,

Anammco Ltd, and Aqua-Rapha Nig. Ltd.

Twenty-three questionnaires were distributed in the Production

unit, Personnel department, Accounting department and Marketing

department of the above mentioned Nigerian Manufacturing

Companies. They were all properly filled and returned, thus; 100%

response.

Each question in the questionnaire has been analyzed separated

with the use of statistical and descriptive analytical tools. Emphasis

on the analysis is on those questions, which have direct bearing or

relevance on the formulated hypothesis or objective of the study

and they are presented in table form.

61
4.1.0 DATA PRESENTATION/ANALYSIS

Table: 4:1: Materials used generally in production

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA AQUA
RAPHA ANAMMC RAPHA
ANAMMCO NBL. NIG. O NBL. NIG.
NIG.LTD. PLC. LTD NIG.LTD. PLC. LTD

PAPER 5 5 5 21.74 21.74 21.74

Metals 3 - - 13.04 - -

Rubbers 2 - - 8.70 - -

Paints 3 - - 13.04 - -

Vehicle Parts 10 - - 43.48 - -

Bottle & Corks - - 10 - - 43.48

Wheat,Sorghu
m,Quine Corn - 10 - - 43.48 -

Water,Polybag,
Milk, Etc. - 8 8 - 34.78 34.78

TOTAL 23 23 23 100 100 100

The above table shows the responses of twenty-three respondents

on the materials used by the above selected manufacturing

companies. It is important to note that papers (stationery) are

62
mostly used for administrative purposes, while the materials are for

individual firm production.

Table: 4:2: Sources of materials - locally or imported

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA-
AQUA- NBL. RAPHA
ANAMMCO NBL. RAPHA ANAMMCO PLC. NIG. LTD
NIG.LTD. PLC. NIG. LTD NIG.LTD. % % %

Imported 8 7 2 35 30 8.70

Locally Made 15 16 21.00 65 70 91.3

TOTAL 23 23 23 100 100 100

It can be observed that 91.30%; 65%; & 70% of material used in

Aqua-Rapha, Anammco & NBL are locally sourced while the rest

percentage (%) are sourced outside.

63
Table 4:3: Costing methods for price determination
RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA- AQUA-
RAPHA ANAMMCO NBL. RAPHA
ANAMMCO NBL. NIG. NIG.LTD. PLC. NIG.
NIG.LTD. PLC. LTD % % LTD %

Process Costing 6 5 6 26 22 22

Specific Or Job
Order Costing 10 9 10 43 39 39

Batch Costing - - - - - -

Joint Product
Costing - - - 0 0 0

Marginal Costing 5 8 5 22 34 34

Absorption Costing 2 2 2 8.73 71 71

TOTAL 23 23 23 100 100 100

It is observed from the statistical table above that these companies

adopt specific or Job order costing as their major costing method.

Marginal costing method is equal adopted to assist in decision

making.

64
Table: 4:4 Cost accounting system adopted for unit pricing
RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA - AQUA-
RAPHA ANAMMCO NBL. RAPHA
ANAMMCO NBL. NIG. NIG.LTD. PLC. NIG.
NIG.LTD. PLC. LTD % % LTD %

Cost Control 1 4 4 4.35 17.39 17.39

Fixing Of Prices 10 8 8 43.48 34.78 34.78

Decision Making 12 9 9 52.17 39 39

All Of The Above - 3 3 0 8.7 8.7

TOTAL 23 23 23 100 100 100

This table shows that Specific or Job Order costing method assist

these companies in fixing of their products prices. This is

represented by this percentage 34.78% and 43.48% of responses in

the responses indicated that marginal costing is used in decision

making.

Table: 4:5 Inspection of materials before production

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA AQUA
RAPHA ANAMMCO NBL. RAPHA
ANAMMCO NBL. NIG. NIG.LTD. PLC. NIG.
NIG.LTD. PLC. LTD % % LTD %

Yes 22 21 23 95.65 91.3 91.3

No 1 2 0 4.35 8.69 8.69

TOTAL 23 23 23 100 100 100

65
This shows that these companies inspect all materials brought by

the supplies and those imported before and during the time such

materials are being received. Not only do they inspect such

materials, they also do continuous stock taking to avoid pilfering

and such other avoidable situation that may arise from time to

time. Both companies adopts fits method in their stock taking to

make sure that materials meant for specific products were used for

them.

Table 4:6 Standards set for Companies’ employees

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA
AQUA ANAMMCO NBL. RAPHA
ANAMMCO NBL. RAPHA NIG.LTD. PLC. NIG.
NIG.LTD. PLC. NIG. LTD % % LTD %

Yes 23 23 23 100 100 100

No 0 0 0 0 0 0

TOTAL 23 23 23 100 100 100

It can be observed that both companies set a standard for their

employees.

66
Table 4:7: Methods for Overhead cost control
RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA AQUA
RAPHA ANAMMCO NBL. RAPHA
ANAMMCO NBL. NIG. NIG.LTD. PLC. NIG.
NIG.LTD. PLC. LTD % % LTD %

Flexible Budget 19 17 17 82.61 73.91 73.91

Fixed Budget 2 3 3 8.7 13.04 13.04

Departmental
Operating Statement 2 3 3 8.7 13.04 13.04

TOTAL 23 23 23 100 100 100

The above table, as well as oral interview with workers revealed that the

company’s fixed cost includes the infrastructural facilities, overhead cost,

depreciation, statutory and other miscellaneous expenses. However, to

rely on a fixed budget as a standard comparison may be misleading.

Fluctuation in output might lead to deviations from the budget, which is

outside the control of the person responsible for budget. Therefore, both

companies uses flexible budget. Institute of cost and management

accounting (ICMA) defines it as “a budget which by recognizing the

difference in behaviour between fixed and variable cost, in relation to

fluctuations in output, turnover, or other variable factors such as

number of employees is designed to change appropriately with such

fluctuation.

67
Table 4:8 Overhead/labour cost affects on product prices.

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA
AQUA ANAMMCO NBL. RAPHA
ANAMMCO NBL. RAPHA NIG.LTD. PLC. NIG.
NIG.LTD. PLC. NIG. LTD % % LTD %

Yes 21 23 21 100 91.3 91.3

No - - - - - -

Particularly 2 - 2 8.7 8.7

TOTAL 23 23 23 100 100 100

The above state that costs affects the prices of both companies’

products.

Table 4:9 Product price determination for purchasers.

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA
AQUA ANAMMCO NBL. RAPHA
ANAMMCO NBL. RAPHA NIG.LTD. PLC. NIG. LTD
NIG.LTD. PLC. NIG. LTD % % %

Almost none - - - - - -

Weak - - - - - -

Strong 23 23 23 100 100 100

TOTAL 23 23 23 100 100 100

The above statement shows that the three companies have a strong

price determination for their purchasers.

68
Table 4:10 Essential factors for product purchasers

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA-
AQUA ANAMMCO NBL. RAPHA
ANAMMCO NBL. RAPHA NIG.LTD. PLC. NIG. LTD
NIG.LTD. PLC. NIG. LTD % % %

Price 13 13 13 56.52 56.52 56.52

Quality,
function, service
details 10 10 10 43.48 43.48 43.48

TOTAL 23 23 23 100 100 100

This table shows that customers are more interested in price of

products as well as quality of the products.

Table 4: 11: Competition effects on the products pricing

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA
AQUA ANAMMCO NBL. RAPHA
ANAMMCO NBL. RAPHA NIG.LTD. PLC. NIG.
NIG.LTD. PLC. NIG. LTD % % LTD %

Mostly differentiated 13 21 21 56.52 91.3 91.3

Almost no competition
with other companies 10 2 2 43.48 8.7 8.7

TOTAL 23 23 23 100 100 100

The above table states that their products are mostly differentiated

in the market and suffers competition except Anammco Nig. Ltd.

69
which stated that they have a very minimal competition in the

market.

Table:4:12 Global Economic Recession on product prices

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

AQUA- AQUA-
RAPHA NBL. RAPHA
ANAMMCO NBL. NIG. ANAMMCO PLC. NIG. LTD
NIG.LTD. PLC. LTD NIG.LTD. % % %

Employment
Adjustment 10 2 2 43.48 8.7 8.7

Streamlining Of
Production
Process And Work
Processes 13 21 21 56.52 91.3 91.3

TOTAL 23 23 23 100 100 100

The above table state that, during global economic recession, that

employment is affected and production of goods are highly

streamlined.

Note:

The research centered mainly on four departments of each of the

companies. Thus: Production Department, Personnel Department,

Finance/Accounts Department and Marketing Department.

Responses from these departments are here under analysed.

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Table: 4:13 (A) NBL. NIG. PLC
RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION
PRODUCTION PERSONNEL ACCOUNTS MARKETING
DEPT. DEPT DEPT. DEPT. TOTAL
Yes 7 2 8 3 20

No - 1 - 2 3
TOTAL 7 3 8 5 23

Table: 4:14 (B) ANAMMCO NIG. LTD.

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION

PRODUCTION PERSONNEL ACCOUNTS MARKETING

DEPT. DEPT DEPT. DEPT. TOTAL
Yes 7 2 8 3 20

No - 1 - 2 3
TOTAL 7 3 8 5 23

Table: 4:15 (C) AQUA RAPHA NIG. LTD.

RESPONSES NO. OF RESPONDENTS PERCENTAGE VALUATION
PRODUCTION PERSONNEL ACCOUNTS MARKETING
DEPT. DEPT DEPT. DEPT. TOTAL
YES 7 2 8 3 20

NO - 1 - 2 3
TOTAL 7 3 8 5 23

These A,B,C table represent the observed responses to the

hypotheses question.

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(A) Expected Value: (NBL. NIG. PLC.)

Dividing through: 20/23 = .869

NOTE: 20 is the number of yes respondents

23 is the total number of respondents from

the questionnaire.

Therefore:

PRODUCTION DEPT.: 0.87 x 7 = 6.09

PERSONNEL DEPT.: 0.87x2 = 1.74

ACCOUNTS DEPT.: 0.87 x 8 = 6.96

MARKETING DEPT.: 0.87 x 3 = 2.61

(B) Expected Value: (ANAMMCO NIG. LTD.)

Dividing through: 21/23 = 0.91

NOTE: 21 is the number of yes respondents

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 23 is the total number of respondents from

the questionnaire.

Therefore:

PRODUCTION DEPT.: 913 x 7 = 6.4

PERSONNEL DEPT.: 913 x 2 = 2.74

ACCOUNTS DEPT.: 913 x 8 = 7.30

MARKETING DEPT.: 913 x 3 = 2.74

(C) Expected Value: (AQUA-RAPHA NIG. LTD.)

Dividing through: 20/23 = .869

NOTE: 20 is the number of yes respondents

23 is the total number of respondents from

the questionnaire.

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 Therefore:

PRODUCTION DEPT.: 0.87 x 7 = 6.09

PERSONNEL DEPT.: 0.87x2 = 1.74

ACCOUNTS DEPT.: 0.87 x 8 = 6.96

MARKETING DEPT.: 0.87 x 3 = 2.61

CALCULATIONS:

Using the Chi-Square approach we have:-

X2 = ( Oi – ei)
ei
Where:

X2 = chi-square

Oi = number of respondents

ei = total number of respondents from the questionnaires

issued.

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Table:4:16: Chi-square calculations for the Departments

ANAMMCO AQUA RAPHA

DEPARTMENTS NBL. NIG. PLC. NIG. LTD. NIG. LTD
PRODUCTION

X2 = (7 - 6.09)2 X2 = (7 - 6.4)2 X2 = (7 - 6.09)2

6.09 64 6.09
YES = 0.136 = 0.0562 = 0.136

NO - - -
PERSONNEL

X2=(2-1.74)2 X2 = (3 - 1.26)2 X2=(2-1.74)2

1.74 1.26 1.74
YES = 0.0389 = 2.4028 = 0.0389

X2 = (1-1.26)2 X2 = (1 - 1.26)2 X2 = (1 - 1.26)2

1.26 1.26 1.26
NO = 0.0537 = 0.0537 = 0.0537
ACCOUNTS

X2 = (8 - 6.96)2 X2 = (8 - 6.96)2 X2 = (8 - 6.96)2

6.96 = 6.96 6.96
YES 0.1554 = 0.1554 = 0.1554

NO - - -
MARKETING

X2 = (3 - 2.61)2 X2 = (3 - 2.74)2 X2 = (3 - 2.61)2

2.61 2.74 2.61
YES = 0.0583 = 0.0247 = 0.0583

X2 = (2 - 2.39) X2 = (1 - 1.26)2 X2 = (2 - 2.39)

2.39 = 1.26 2.39
NO 0.636 = 0.0537 = 0.636
Therefore: sum total of all the departments.

(A) NBL. NIG. PLC. = 0.1360 + 0.0389 + 0.1554 +0.0583 + 0.0636

+ 0.0537 = 0.5059

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 (B) ANAMMCO NIG. LTD. = .0562 + 2.4028 + 0.0671 + 0.0247 +

0.0537 + 0.0537 = 2.6582

(C) AQUARAPHA NIG. LTD. = 0.1360 + 0.0389 + 0.1554 +0.0583

+ 0.0636 + 0.0537 = 0.5059

Decision Rule: Accept Ho: if table value is greater than

computed value, otherwise reject it.

Therefore; comparing the calculated chi-square values of 0.5059;

2.6582 and 0.5059, of the three companies with the critical chi-

square value from the table, under X2 @ 0.05 of 3 degree of

Freedom, which is 7.815?

It is evident that the table value of 7.815 is higher than the

calculated chi-squares. Therefore profitability of these companies is

dependent on effective cost control and price determination.

76
 CHAPTER FIVE

RECOMMENDATION, FINDINGS AND CONCLUSION

It can be observed that manufacturers have recognized that pricing

a product is one of the most important and complicated problems

which they have to face. In attempting to resolve this problem and

trying to find some general guidelines by which to establish a sound

pricing policy, they have agreed that cost is one of the factors which

must be taken into consideration.

The researcher is therefore not only interested in the treatment of

collated cost data, but also in the avoidance of loss of useful data

which if unnoticed will render the whole information obtained from

the analysis useless. The research also concern on the efficient

operation through the minimization of costs incurred.

5.1 FINDINGS

It is evident from this study that price determination and

profitability of manufacturing companies is dependent on the

effective costs control. This finding was proved by the test of

hypothesis, using chi-square method.

77
It has observed that effective cost control system eliminates waste,

lower labour costs and improves output per unit of input.

This study observed that cost can be contoured in two ways:

(a) Operating Control

(b) Accounting Control

Having observed that the companies under review used job order

costing method and this makes it possible for series of independent

contracts to be undertaken.

Raw materials used by both companies under-review are not 100%

locally sourced. Procurement of the imported material is difficult.

This is occasional by unsteady exchange rate, tariffs on imported

materials undue freight delays. Because of this they do not

determine their economic order quantity. Rather perpetual

inventory system, which enables book balance of stock to be known

from stock ledger, is used.

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5.2 RECOMMENDATIONS

The importance of cost control analysis and price policy for the

manufacturing sector of the economy cannot be over emphasized.

Although, cost control is never an end in itself in any

manufacturing or brewing establishment, but it is a means to an

end. At least it will reduce cost of materials, labour and overhead.

It is based on this that the researcher has recommended the

following:-

(a) Price policy and cost control should be a continuous activity

aimed at improving efficiently used

(b) Raw materials should be well kept through perpetual

inventory system with constant stocktaking at particular time

to enable realistic stock levels to be known and adjustment

made accordingly if there is shortage.

(c) Cost control also involved continuous training of the

employees.

(d) The economic order quantity (EOQ) model and its associated

re-order quantity parameters should be emphasized. This will

79
 enable the company to know when to place and order the

quantity to be ordered in a year.

(e) The manufacturing companies, especially those under review

should do more research on local raw materials. This will save

the delays in arrival of imported raw materials and high

exchange rate and control on price determination policies of

the firm.

(f) Flexible overhead budgets should be used for easy and correct

comparison between actual and budgeted overhead. Variance

should be prorated between stock of finished goods, work-in-

progress and cost of goods sold. Because of the amount is high

in one year, it reduce the profit of that year to unimaginable

level, while some of the finished goods and work to next year

without the cost that are connected with them.

CONCLUSION

This study “Cost Accounting Information and Price

Determination” is out to highlight the importance of a good

costing system in any manufacturing company. It is also the aim

80
of this research to study in detail the causes of the observed

short fall in the utilization of good cost accounting information

system in the product pricing of most firms.

Though cost structure is only one among other factors that

influence price, but a good costing system which maximizes

efficiency, will place the organization on a sure footing among

other factors.

Proper costing system facilitates control and adequate control

brings about efficiency. Efficient operation maximizes production,

which is, producing the highest possible quantity at the least

cost.

The cost Accountant or cost Analyst should see himself as a

technical expert who is out to know what is happing and why it

is taking place. He is not there for high sum cost collection and

averaging but for proper control and analysis of cost. For proper

control and analysis of cost, there must be adequate

classification and allocation, and the use of the recommended

method and technique for product costing either for inventory

valuation or for income statement. It is also from this same

81
system that needed information for policy decision such as

pricing decision forwarded to management.

Price policies are the basis on which price decisions are made.

They are an important ingredient in the firm’s total image.

Manufacturing companies in Nigeria are advised to spend more

managerial effort in the establishment and periodic review of

their pricing policy.

The researcher gives a great deal of thought and planning to our

engineering, manufacturing, advertising and sales promotion

policies. Certainly, the same kind of careful study and planning

should be directed towards the formulation of those price policies

that will best serve the various long-run objectives of our

business.

82
 REFERENCE
Allan R.T Drobin: Management Accounting, an Introduction Pitman
BOOKS London 1961 pg. 28

Charles T. Horngren: Cost Accounting a Managerial Emphasis

(Presentice Hall India) sixth Edition (1990)

Rotch I. and Ballen: Cases in Management Accounting and Control

Systems (Richmond Dame India) 1982 pg, 241

Louis E. Boom and Warren Haynes: Pricing Decision Business

Management Research summary (1966) Washington DC.

Adeniji A.A.(2001) An Insight into Management Accounting

Corporate Publishers, Yaba Lagos.

Bathy J. (1979) Analysis of Manufacturing Variances In Standard

Costing MacDonald & Evans Ltd. London
Jones C.L. (1976), Management in Financial Management for
Managers.

Armond L.W.: (1984), Cost Accounting Analysis and Control.

London Macmillan Publisher Ltd.
Nwabuzor R.: (2001) ICAN preparatory Note and Management

Accounting.

83
Brown J.C.: (1975) Cost Accounting & Cost methods (Macdonald

& Evan Ltd.)

Carrol P: (1953); How to control production costs.

MacGraw-Hill Book coy. Inc. London.

Horengren Charlest:(1990)Cost Accounting

managerial Emphasis (New Delhi).

84