CHAPTER ONE

THE PROBLEM AND ITS SCOPE

INTRODUCTION

The need for cost accounting came with increased industrialization,

engineering and expansion in manufacturing.Cost accounting has a major purpose of

accumulating the cost of an organization’s products and services. It is therefore obvious

that in efficient system of costing is essential for industrial control.The cost accounting

will draw information proved by the financial accounting system, but will need to obtain

much more detail of the internal working of the business. Fortunately, there is help for

managers that have to make these difficult decisions.

Accounting deals with recording, measuring and reporting the income and

expenditure of an organization to two separate groups of people i.e. the managers and

owners (Chukwukadibe, 2009). It has often been considered as a series of activities

which are linked together and culminate in a progression of steps summarizing and

finally communicating information to its users. We may say therefore that accounting

information has a special purpose and that is "decision making". Cost and management

accounting are the parts of accounting discipline which have developed, to meet up with

the progress in technological advancement, production, sales and finance. These aspects

of accounting have broadened the boundaries of accounting profession and made it more

useful to modern business enterprise.Various uses of the cost information provided

include judging performance and inventory valuation (Brignall et al; 2001). Information
provided by the costing system has been used to inform the pricing decisions of managers

through a method known as cost – plus pricing (Guilding, Drury &Tayles, 2005). This

method uses the costs of products as determined by the cost accounting system to form

the base from which a price can be set. A margin is calculated that not only covers the

costs of the product, but also provides a profit to the business.This method of pricing is

simple to execute, but according to the economic theory is not efficient for setting prices

(Lowell, 1967). Cost accounting captures financial and non-financial data to produce

accurate inventory costs. Management can use this information to help set competitive

and profitable product prices. Good cost accounting provides necessary information such

as the break-even selling price of your products and how product costs change as volume

increases or decreases. For service industries, the application of cost accounting was

problematic due to their unique characteristics (Schlissel & Chasin, 1991). The costing of

inventory could not apply for services due to: customer presence in the delivery,

intangibility of the service, heterogeneity of performance, simultaneity of production and

consumption, and perishability of services (Brignall et al., 1991). Despite this issue, costs

remained a prominent base to price services.

Price determination is one of the most crucial decision which every enterprise

establishment should pay great attention to despite how intelligently the product

distribution and communication mixes are conceived. Earlier research into pricing

practices was held in the domain of manufacturing, where cost accounting was primarily

involved (Hall & Hitch, 1939; Schomer, 1966; Lowell, 1967; Shipley, 1981; Hall, Walsh

& Yates, 1997). For an organization, the decision to set price has a direct impact on the

revenue it can earn. Price and volume are the two components of the revenue equation,
and the choice to focus on one will directly affect the other. The price of a business

product is an important part, but not the only part of the marketing mix (Govindarajan&

Anthony, 2003). If the price is set too high the customer may turn away, but a high price

may also associate with desirability to the customer (Skinner, 2000). If a business can

achieve an efficient price for their product they will maximize their revenue earned.For

an organization, the decision to set prices has a direct impact on the revenue it will earn.

The traditional design of cost accounting systems has been criticized for defining a

distinction between fixed and variable costs (Cooper & Kaplan, 1988), despite

observation of the volatile nature of fixed costs. An alternative design that has been

considered by researchers is to distinguish short-term and long-term variable costs, and to

allocate costs on the basis of activity (Cooper & Kaplan, 1988, Brignall et al., 1991).

Relevance as defined in accounting terminology--indicates that accounting

information provides a necessary benefit for the end user. This study entitled "Relevance

of Cost Accounting Information to Price Determination" is aimed at establishing how

adequate cost accounting information can assist management in making sound price

decision.The research geared its attentions to the cost structure especially as it affect

manufacturing industries,Magnolia Ice Cream Manufacturing Equipment and Supplies in

particular, which constitute a major determinant of the price of product of the firm, which

vary with the outcome, the type of service or commodity. And it must decisively to the

satisfaction of consumer, in punch of analysis described customer/consumer of a specific

product as a king, because its patronage to such commodity could be identifying as

undergone production process.

 “Information has no value in itself, its value is derived from the changes in

decision behaviour caused by the information being available, it follows from this that

more detailed information, more accurate information or earlier information is not

necessarily better information only if it improves the resulting decisions, the production

of information only incurs cost which are frequently considerable. Benefits only arise

from actions.”

THEORETICAL/CONCEPTUAL FRAMEWORK

This study is anchored to the theory of Norma D. De Leon, Ellery D. De Leon and

Guillermo M. De Leon’s “Cost Accounting” which asserts cost accounting is an

expanded phase of general or financial accounting which informs management promptly

with the cost of rendering a particular service, buying and selling a product, and

producing a product. Furthermore stated factors involved in determining the price of a

product are direct materials, direct labor and factory overhead.

Direct materials. Direct materials, as cited in N. De Leon, E. De Leon and G. DE

Leon (2016), are material that become part of the finished product and can be

conveniently and economically traced to specific product units. For instance; lumber used

in making furniture, fabric used in the production of clothing, iron used in the

manufacture of steel products, and rubber used in the production of athletic shoes

(Vanderbeck, 2009).The cost of these materials can be directly charged to products

because physical observation can be used to measure the quantity used by each product

(Mowen, Hansen and Heitger, 2008).Cost of direct materials includes not only the

invoice price of the materials purchased, but also the purchase expense such as, import
duty, dock charges, marine insurance, freight, carriage and cartageinwards, directly

incurred on the materials purchased. In addition to that direct materials compromise: all

raw materials used in the manufacture of finished goods; materials specially purchased

for a specific product, job, service or process; components or parts purchased outside or

produced in the factory and used for a particular job; basic or primary packing

materials(Mehta, 2016).

Direct labor.Direct labor consists of those labor costs that can be specifically

traced to or identified with a particular product (Drury, 2008).It is the labor which is

directly engaged in the productive operations such as the manufacture or conversion of

raw materials into finished goods or the completion of a job(Mehta, 2016).Direct labor

costs include all labor costs for specific work performed on products that can be

conveniently and economically traced to end products, as cited in N. De Leon, E. De

Leon and G. De Leon (2016). Direct labor includes the following: labour directly

engaged in the actual production of a product or on the completion of a job; labor engage

in aiding the manufactures by way of supervision, maintenance, tool setting and

transportation of materials; labor of inspectors, analysts, specially required for a

particularproduction(Mehta, 2016).

Factory overhead.All product costs other than direct material and direct labor are

put into category as factory overhead (Mowen, Hansen and Heitger, 2008). Factory

overhead costs are a varied collection of production-related costs that cannot be

practically or conveniently traced directly to end products, as cited in N. De Leon, E. De

Leon and G. De Leon (2016).Examples of factory overheads are: power such as

electricity, coal, steam, gas, and oil; factory lighting and heat; factory rent, rates and
insurance; works stationary; cost of indirect materials, such as lubricating oils, cotton

waste, soaps, thread nuts, bolts; indirect wages, such as foremen's salary,

enginemen'ssalary, work cleaner's salary, watchmen's salary, gate keeper's salary, time

keeper's salary, works manager's salary; overtime wages of factory workers;normal idle

time wages of factory workers' welfare expenses; work stationary; drawing office

expenses; estimating expenses; general laboratory expenses; internaltransport expenses;

repairs of factory building, machinery equipment; depreciation of factory building, plant

and machinery and equipment; expense incurred ongeneral experiment and research;

expenses incurred in giving training to apprentices of new employees; municipal taxes in

respect of factory (Mehta, 2016)

SCHEMA OF THE STUDY

The schema of the study is presented in figure 1.1. The bigger circle found on the

left side named “Price determination” depicts the dependent variable while those three

encircled words on the right depict the independent variable.

Figure 1.1 SCHEMA OF THE STUDY

Direct
Materials

Price
Determination Direct Labor

Factory
Overhead

STATEMENT OF THE PROBLEM

A view shared by previous researcher on this topic that there has been a shortfall

in the utilization of cost accounting information in some organization and their pricing

policy decision making. The aim of this study is to answer the following questions:

1. What is the demographic profile of the respondents in terms of :

1.1 Gender

1.2 Age

1.3 Position

1.4 Educational Attainment

 2. Does the company determines the price with the help of cost accounting

information?

3. If it does, how it affects the profit of the company:

3.1 Increase

3.2 Decrease

3.3 No Effect

4. Is there a significant relationship between cost accounting information and

price determination?

HYPOTHESIS

Ho: There is no significant difference between cost accounting information and

price determination.

SIGNIFICANCE OF THE STUDY

This study relevance of cost accounting information to price determination aims

to be beneficial to the following:

Customer.

Manager of the

Future researchers.The proposed study will benefits and help the future

researcher as their guide. The study can also open in development of this study.The

findings of the study will serve as reference of future researchers to develop their future
studies. The inferences established out of the findings in the research investigation shall

enable them to stabilize and strengthen their own inferences such replicability shall

ensure the validity of future-related researches

SCOPE AND DELIMITATIONS OF THE STUDY

The scope of this study is restricted to the cost accounting information and its

utilization in determining the price of the products. This study was conducted in

Magnolia Ice Cream Manufacturing Equipment and Supplies located at Dipolog City

Zamboanga del Norte. Its coverage limits to the accountant and managers of the said

company. The purpose of this study is to determine the importance, relation, and use of

cost accounting information to price determination.

DEFINITION OF TERMS

Price. A value that will purchase a finite quantity, weight or other measure of a good or

service.

Cost accounting. The recording of all the costs incurred in a business in a way that can

be used to improve its management.

Cost accounting information. Commonly used in financial accounting information, but

its primary function is for use by managers to facilitate making decisions

Direct materials. Materials that become part of a finished product and can be

conveniently and economically traced to specific product units.

Direct Labor. Includes all labor costs for specific w0rk performed on products that can

be economically traced to end products.

Factory Overhead-varied collection of production-related costs that cannot be

practically traced directly to end products.

Price Determination.

Product Pricing.

Revenue.
 CHAPTER TWO

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presents the related literature and studies after the thorough and in-

depth search done by the researchers. Various points of view are taken into consideration.

This will also present the theoretical and conceptual framework to arrive at a clearer

understanding of the study.

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.

A person needs to understand what cost accounting encompasses to comprehend

why it is beneficial for a business to implement an effective cost management system.

Cost accounting seeks to provide cost information to cost objects. The term cost is

defined as "the cash or noncash assets sacrificed for goods and services that are expected

to bring a current or future benefit to the organization" (Hansen 24). For most companies,

the benefits represent the revenues in an organization. Whenever costs are used to

provide revenue, the costs expire and are called expenses. Ultimately, expenses are

deducted from the revenue of a company to provide insight into the profit of the business.

The costs that do not expire represent the assets of the company. Examples of these costs

are land, building, and supplies of an organization. The difference between expenses and

assets depends solely on the timing of the costs. Cost objects are "any item, such as
products, customers, departments, projects, and so on, for which costs are measured and

assigned" (24). In a shoe factory, the cost object is the shoe that is being produced. A cost

object can extend to entire departments within a factory. If one wants to determine the

cost of maintaining the utilities department inside the factory, the utilities department is

the cost object. By identifying the cost objects within an organization, executives can get

a sense of the costs involved in developing a certain product or maintaining a particular

department. Thus, executives can use cost accounting to complete three primary

objectives: product costing, planning and control, and decision making.

Additionally, ineffective cost accounting systems exist because managers fail to

separate overhead costs into different cost pools. Alder states that the “vast majority of

companies categorize [overhead] into one cost pool” (Adler 31). The three costs

associated with a product are the materials costs, the labor costs, and overhead costs.

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:

Materials costs is the amount of money invested in the production of a

product. Raw material costs 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 total costs of raw materials tend to increase as number of products manufactured

increases.
Direct labour 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. A

labour cost consists of gross wages paid to those who physically and directly work on the

goods being produced. For example, wages paid to a welder in a bicycle factory who

actually fabricating the frames of bicycles would be included in direct labor. On the other

hand, the wages paid to a welder who is building an assembly line that will be used to

produce a new line of bicycles is not direct labor. In general, indirect labor pertains to

wages of other factory employees who do not work directly on a product. Indirect labor is

rolled into manufacturing overhead (I. Narsis, 2009).

Factory overheads cost 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. Overhead

costs are also known as indirect manufacturing costs, burden, or other synonymous terms.

Factory overhead is difficult to trace to specific finished units, but its cost is important

and must be allocated to those units. Normally, this allocation is applied to ongoing

production based on estimated allocation rates, with subsequent adjustment processes for

over-or under-applied overhead. This is quite important to product costing, and will be

covered in depth later (Narsis, 2009).In these instances, management puts all costs that

they cannot charge to materials or labor into overhead. In the Encyclopædia Britannica,
Rider defines cost accounting as “a system of accounting designed to show the actual cost

of each separate article produced or service rendered” (Rider, F., 1936, p. 332). The

process of cost accounting is more clear in Kohler’s definition in A dictionary for

accountants, where it is “that branch of accounting dealing with the classification,

recording, allocation, summarization and reporting of current and prospective costs”

(Kohler, EL., 1970, p.128). In other words, cost accounting is a mathematical

approximation or economic calculation of resources (including the durables, working

time, space, knowledge and ideas) consumed by a cost object during the course of

manufacturing products.

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. Variable manufacturing costs are those ones that vary

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. 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.

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 29 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.

The running of any business essentially constitutes a lot of processes of

converting inputs to outputs; a common language is therefore needed to perceive these

processes. Since mathematics is a universal means for capturing reality, the resources

consumed, although in various forms, are translated into economic resources that are

costs. This translation is appealing for it makes everything incredibly easy and evident,

that it can be understood by people all over the world.

Ajibolade et al. (2010) studied the performance effects of cost accounting as part

of the managerial accounting system especially those of developing countries and to

provide evidence on influences on company’s performance that could assist in efforts to

improve the performance of manufacturing companies. While DickForde et al. (2007)

represented a pilot study that aimed to access and disseminate information for improving

the use of management and cost accounting to increase global effectiveness of companies

in the Barbados, results showed a lack of a clear defined function management

accounting, coupled with the extensive use of management accounting information for

costing and pricing decisions, that still need further research.

 Cost accounting is a process of collecting, recording classifying, analysing,

summarizing, allocating and evaluating various alternative courses of action and control

of costs. Its goal is to advise the managers on the most appropriate course of action based

on the cost efficiency and capability. It is also a type of accounting process that aims to

capture a company’s costs of production by assessing the input costs of each step of

production as well as fixed costs such as depreciation capital equipment (N. De Leon, E.

De Leon, and G. De Leon, 2016).

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. 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. 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.

Cost accounting is a process of collecting, recording classifying, analysing,

summarizing, allocating and evaluating various alternative courses of action and control

of costs. Its goal is to advise the managers on the most appropriate course of action based
on the cost efficiency and capability. It is also a type of accounting process that aims to

capture a company’s costs of production by assessing the input costs of each step of

production as well as fixed costs such as depreciation capital equipment

Early research into the subject of pricing decisions had focused on the practices of

manufacturing businesses. An important contribution to the literature is the research

conducted by Hall and Hitch (1939), who conducted one of the first major studies into the

use of full costs to base decisions. The research found that only a minority of

entrepreneurs based their pricing according to marginal revenue and cost curves as

espoused in the profit maximisation model (Lucas, 1999).

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. 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. Pricing a product is one of the most important and complicated problems which

face entrepreneur and business firms. In trying to 47 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 windingup, 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 48 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.

 CHAPTER THREE

RESEARCH METHODOLOGY

This chapter presents a description of the method used and research environment,

respondents of the study, research instrument, validation of the instrument, scoring

procedure data gathering procedure and statistical treatments used. Having a clear

understanding of such methodologies will guarantee that a study was been done in

organize method. Also, methodologies will make the information gathered clearer and

accurate for those who desire to know about it.

Method Used
 The descriptive research method is used in gathering the needed information for

this study. Specifically the researchers utilized a questionnaire type of descriptive

research method which enables them to gather information from the respondents

without the respondents having any difficulties in answering the questions

required for the researchers to have information regarding relevance of cost

accounting information to price determination. The term descriptive research refers to the

type of research question, design, and data analysis that will be applied to a given topic.

The type of question asked by the researcher will ultimately determine the type of

approach necessary to complete an accurate assessment of the topic at hand.

Research Environment

This study focused on the applicability of cost accounting information to price

determination in Magnolia ice cream manufacturing equipment and supplies located at

Dipolog City, Zamboanga del Norte.

Respondents of the Study

The respondents of this study the accountant and managers of Magnolia Ice

Cream Manufacturing Equipment and Supplies in Dipolog City were chosen to

participate in the process.

Table 1. frequency distribution of the Respondents

GENDER

POSITION IN MALE FEMALE RESPONDENTS PERCENTAGE

THE (sample of population)

 COMPANY

MANAGER 2 3 5 50%

ACCOUNTANT 1 4 5 50%

TOTAL 3 7 10 100%

The table above shows the frequency distribution of the respondents which gave a

total of 20.The respondents of each bank is consists of 1 branch manager and 4

employees.

Research Instrument

In this study the researchers used questionnaire in gathering data.The

questionnaire will be used to assess the accountant and manager’s perceptions of how

relevant are cost accounting information to price determination. The researchers used a

questionnaire in the data gathering. The questionnaire was composed of two (2) parts.

The first part was designed to determine the profile of the managers-respondents.

It asked questions about their sex and age while the second part delved on the criteria of

success factors in banking industry.

In the second part, the managers-respondents would check the items that affect

the success factors in the new financial services of banking industry. The following

numerical scale was the corresponding description used.

Description

Numerical Scale

Very Much Successful (VMS)…………………………………... 5

 Much Successful…………………………………………………. 4

Successful………………………………………………………... 3

Less Successful………………………………………………….. 2

Not Successful…………………………………………………… 1

VALIDATION OF THE INSTRUMENT

To ensure the validity of the instrument, the researchers sought valuable

corrections, suggestions, and opinions from their adviser and from persons who were

well-acquainted and familiar with the case that is in study to ensure that the questions

were appropriate and could very well illicit substantial responses. Pertinent documents

were also referred to and opinions of persons who have had established themselves as

authorities in related fields of endeavor were also considered and pondered upon to help

in the formulation of the questions. The corrected form was incorporated and was

defended at the time of the research proposal defense.

SCORING PROCEDURE

Numerical Value Descriptive Value Range of Scale

5 Very Much Successful 4.21-5.00

4 Much Successful 3.41-4.20

3 Successful 2.61-3.40

2 Less Successful 1.81-2.60

1 Not Successful 1.00-1.80

 To determine the

Scale Range Description Rating Descriptions

5 4.21-5.00 Very Much Successful This is a rating given to a

statement where provisions are

very much effective over the

expected outcome. This rating

is described as (VMS).

4 3.41-4.20 Much Successful This is a rating given to a

statement where provisions are

much effective over the

expected outcome. This rating

is described as (MS).

3 2.61 -3.40 Successful This is a rating given to a

statement where provisions are

moderately effective pertaining

to the possible outcome. This

rating is described as (S).

2 1.81- 2.60 Less Successful This is a rating given to a

statement where provisions of

the expected outcome fall below

average line. This rating is

described as (LS).
1 1.00-1.80 Not Successful This is a rating given to a

statement where provision are

not effective at all. This rating

is described as (NS).

Data Gathering Procedure

The data for this research were collected using a survey questionnaire. The survey

was created using suitable questions modified from related research and individual

questions formed by the researcher. The researcher gives the questionnaire to the

respondents by personal delivery.

Statistical Treatment

Descriptive statistics tell what is, while inferential statistics try to determine cause

and effect.