COST ACCOUNTING INFORMATION AND PRICE DETERMINATION

(A CASE STUDY OF NIGERIAN BREWERIES PLC, ENUGU)

ABSTRACT

 

Increased advancement in industrialization, engineering and general commerce has thrown a great challenge to managers.  There is increased competitions, and the survival of any company lies on the ability of the managers to apply the scare resources efficiently.

Efficient management of resources call for proper control of inventory and revenue therefore, effective system of costing and good pricing policy are central and pre-requisite for the survival and growth of any organization in the global economic village.

The topic “cost Accounting information and price determination’ is aimed at establishing how adequate accounting information can assist management in making sound pricing decision.

Many business organizations in Nigeria collapsed in the recent past because they could not break-even.  In periods of boo, manufacturers are able to show profits notwithstanding the leakages which pass unchecked but in periods of trade competition, concealed inefficiencies have to be tracked down and rigorous control must be exercised to ensure even modest margin of profit, there is not yet an agreed best method of costing products though, it may be helpful to recognize that cost allocations are being used to obtain a mutually acceptable price and not necessarily to portray cause- and effect relationship of cost incurrence.  But price determined from efficient traditional income statement approach and /or contribution margin approach will most probably approximate the price of the product to its value.

 

LIST OF TABLES

 

• A simple cost statement showing profit
• A summary of cost in the brewing house
• A summary of cost in the celiar
• A summary of cost in the Filtration
• A summary of cost in the Bottling center
• A summary of cost in engineering cost center
• Total cost for production department
• Estimated cost of brewing star lager bee
• The pricing policy of the company personnel
• The Relationship between marginal costing and costing method
• Cost method adopted
• Application to full absorption costing
• Other considerable factors
• Effect of competitors price of bee
• Basis of pricing decision
• Effect of government legislation on their pricing policy
• Fixed or Determined selling price of the products

4.1.0 Effect of market forces on pricing decision

4.1.1 Contingency table (function of costing information).

CHAPTER ONE

INTRODUCTION

• Background of the study
• Statement of problem
• Objective of study
• Research questions
• Research hypothesis
• Significance of the study
• Background of the firm studied
• Definition of term

 

CHAPTER TWO

REVIEW OF RELATED LITERATURE

• Costing method
• The flow of cost in a manufacturing firm
• Other theoretical work on cost and pricing
• Limitation of cost oriented pricing
• The nature of pricing problem and theories
• Cost based pricing theories
• Other variable that influence price determination
• Pricing to achieve corporate objectives

 

CHAPTER THREE

RESEARCH METHODOLOGY

• Research design
• Area of the study
• Population of the study
• Sampling procedure
• Instrument for data collection
• Validity of the instrument
• Reliability of the instrument
• Method of administration of the instrument
• Method of data analysis

 

CHAPTER FOUR

DATA PRESENTATION

• Test of hypothesis
• Analysis and interpretation of responses

 

CHAPTER FIVE

DISCUSSION, IMPLICATION, AND RECOMMENDATIONS

• Discussion of results
• Recommendations
• Conclusion

References

Bibliography

CHAPTER ONE

 

INTRODUCTION

Accounting 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”.  The task of the accountant is to transform raw data information.

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.

Cost accounting is probably the field of accounting which has developed most greatly within the last half of this conturing and there is no doubt about its growing importance.  This is partly because of the growing complexity of modern production methods, which results in greater capital investment and higher proportion indirect costs, and partly a reflection for the growing competition and widening markets in the business world.

All these factors necessitate the keeping of systematic and accurate records which will show the cost of goods produced an contracts fulfilled.

The job of accounting has shifted emphasis and focus from recording, interpreting and analyzing historical financial transactions, to a more challenging task of setting controls, devising the most efficient method of collecting, interpretation, analyzing and transformation of costs into useful information which is made use of by management in decision making which effects the future.

A cost/ management accountant is now deeply involved in helping management to set-up control systems that make for co-ordination of all the activities of an organization thereby ensuring proper and purposeful direction and effective control.

The cost accountant will draw on information, provided by the financial accounting system but he will also need to obtain much more detail of the internal workings of the business.  He will use data in monetary and non-monetary forms of house worked capacity of materials used, product manufactured, machine running hours, idel time ect.  He is concerned with finding the actual cost of products operations and departments, often comparing this with an estimated or ideal cost.  The emphasis on decision  making in recent years has brought together different disciplines which once were viewed as separate areas of knowledge.  The accountant has to be knowledgeable over a broad area if, he is to be efficient in providing information, which is relevant and useful for decision making.  The great task of an accountant is to transform raw data into information.  as an information specialist, the management accountant must be aware of the nature of information and its attributes.

“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 its improves the resulting decisions, the production of information only incurs cost which are frequently considerable.  Benefits only arise from actions”.  Many difficult decisions arise as to whether to buy new equipments which will make new products or save cost and whether to make or buy components, whether to accept work at cut threat prices etc. this often require special cost analysis and studies.

The cost accountant discusses with the engineer about the life span of the plant and machinery, the most economic and efficient way of its use, the most appropriate method of depreciation, whether it will be more profitable to dispose it at a salvage value or to continue its use until it is scrapped.

The supervisor provides the cost accountant with the information needed as to the usage of fuel, gas, energy. Light and heat etc.

The cost accountant will also look into the administration of wages; determine whether it is economical to engage labour at a piece rate or at a time rate, employ more workers and make room for shift futy or pay overtimes, the profitability or otherwise of the firm being machine or labor intensive cost accounting ensures the maintenance of good salaries and wages record, of classes of workers.  Cost accounting has aided management in the formation of a sound and enviable labour policy and the determine the rate of turnover of labour.

Accounting information has assisted managers to control cost of raw materials effectively, determine the re-order level of stocks of raw materials.  That is, after taking into account the minimum stocks develop and the safety stock and also considering the carrying (ware-houseing) and ordering costs, rate of efficiency etc.

The cost accountant laises with the works manager and from him, knows the processes involved in the production or manufacture, the cost incurred at every stage and seeks ways of controlling costs or improving the method of work which leads to reduction in cost and ultimately to increased efficiency.

The cost and management accountant therefore should have an in-depth knowledge of cost in every sphare of the organization in which he works.  He is usually a member of any budget committee set up in the organization and in some cases the chairman.  Hence it is his knowledge about the operational standards and the information which he obtained from the analysis of collated costs that form the basic budgeting tool.  In fact, with the development of cost and management accounting, the job of an accountant has increased from that of a financial historian to that of a financial analyst who provides management with needed information for future decision, for comparison and efficient management. Without an effective system of cost accounting, it is doubtful whether a business of any size can survive in the intensively competitive condition of today.

 

• BACKGROUND OF THE STUDY

There are no more important decision in market affairs than those connected with pricing.  No matter how intelligently the product distribution and communication mixes are conceived, improper pricing of a product may nullify the effect of all other actions. But, in spite of the importance if pricing decisions, the skills and analysis which are often used in practice do not approach the professional orientation used in the management of advertising, sales promotion or personal selling.  Perhaps one of the reasons is that price decisions cut across all areas of Business Operation and are not central in any of the functional divisions of the firm’s organization.

This research work therefore among other things, intends to highlight on management’s seemingly indifference towards this all important issue.  This research titled “cost accounting information and price determination” as stated, directs attention to the cost structure factor of the price. though the cost structure especially as it affects a manufacturing industry constitutes the major determinant of the price of the products.  There are other factors which influence the price of products of firms which vary with circumstances, types of the commodity services rendered.

Before delving into some of these other factor that influence product prices, let us first and foremost, direct our attention to the most important factor at play in the cost and price of beer, including components of the cost structure.

 

HISTORICAL ACCOUNTS

These are financial statements prepared from past activities of the enterprise.  Since these are actual figures of cost and revenue obtained in the previous periods, the management can determine the price of its products through the information obtained from this past financial statement.  This method is more reliable when there is steadiness in economic activities.

BUDGETED COST

The budgeted cost is an information system through which cost can be estimated and controlled.  Management most often base it price policy on budgeted cost or estimated prices through observed trends in economic activities.  This is mostly applicable in newly establishment firms whose products are making their first outing to the market.

MARKET FORCES

DEMAND AND SUPPLY:    The price of beer is affected by the forces in the market.  Beer industry being free enterprises market cannot be so rigid in its price policy since it is a price taken, so with a high demand especially when there is a decrease / fall in the prices of other food stuffs, the price of beer will increase.

Equally, the reverse is the case with arise in the price of essential commodities (Food stuffs).

CAPACITY OF FACTORY

          This refers to the quantity or volume of the products that can be produced in a run or an average of the total output possible within a period.  The factory with larger size or capacity will produce and sell at a lesser price than a small sized one.  For examples Nigerian Breweries plc has a capacity of about 750000 hectolitres or 625 million cartons per year while its sister industry, the life Breweries plc has a capacity of about 430 hectolites or 5.8 million cartons per year.  Under normal circumstances and other varioables held constant, Nigerian Breweries beer should be changer.  The reasons are:-

1. Large sized capacity enjoyz quantity discounts, especially in the purchase of materials.
2. Some fixed overheads like depreciations, some types of labour, rants rate etc, are shared by the large quantity of production and this makes the fixed cost to be lower per unit of product. Also the sales expenses per carton of beer will be lower with capacity production.
3. Other costs like maintenance cost, top management salaries, entertainment and promotion expense are cheaper per unit of production with increase in capacity.

 

5. SALARIES AND WAGES

          This is sub-divided into direct and indirect: direct wages are these that are directly attributable to production whereas, indirect wages are those not associated with the actual manufactures but in all, they constitute the cost upon which the value of product is measured and other things like.

1. Quarantining
2. Hearty overtime or payment for unnecessary overtime

• Number of the expatriate officers in the brewery.

The salaries paid to these expatriates are usually very high and in some cause are paid in hard currency.  All these tend to increase cost abnormally.

 

6. RAW MATERIAL

Beer brewing requires the following raw materials, viz sorghum, maiza, hops extracts, hops power and caramel.  These raw materials especially soghum and maize constitutes the major cost of bee. Helps and caramel being imported, maize as a raw material forms a significant cost of beer.  For example, when the price of maize was #14,000.000 per tonne, the price of a carton of beer was #300.00 but as the price of a carton of beer rose to #800.00

It should be noted that the above named material are not exhausitive and do not include consumable materials such as the filtration materials (example: ascorbic acid, filter sharets, keto lods) and clearing agents (example: p3, oxonia, litic acid, bar soap).

 

 

7. EFFICIENCY

          The efficiency  of management affects the cost of its products.  Efficiency can result from proper control of the enterprises activities, adequate work supervision, reduced wastes and abnormal loss, decreased idle time, employing the minimum labour requirement that is qualitative as against quantitative labour force.  With increase in efficiency, the cost of production decrease and consequently, the profit will be affected.

 

8. ECONOMIC TRENDS

constant fluctuations in the general economic activities affects every element of the economic system and beer industry, being part of the system must be affected either directly or indirectly.  For instance, before the advent of second-tier foreign exchange market (S.F.E.M), the value of naira was strong in the foreign market.  Then the value of one dollar was approximately 80k but, the rate of foreign exchange has taken a dramatic tum since the introduction of  S.F.E.M.  At the initial time, the official SFEM rate was #12.00 per one us, dollar, currently, with the operation of guided deregulation and Autonomous foreign exchange market (A.F.E.M); The prevailing rate is #185.00 per dollar, for government transactions and #185.00 per dollar for non-Government transactions.  As a result of this, the prices of both imported and local raw materials and spare parts which constitute above 90 percent of the cost of beer escalated similarly.

The enumeration above are those factors that can inflence the cost and price of bbe in this country within the enterprise.  We shall briefly look at other variables that may be take into account before a firm formulates its pricing policy.

1. pricing to meet the welfare of the public. In this cases, the firm is faced with a responsibility to the public.  In such cases, the price which produces satisfactory profits may be unacceptable to the market.  It is unacceptable in the sense that only a small number can take advantage of the product or that the price would bring a deluge of public criticison.  Under such circumstances, a price much lower than the necessary  price to maximize profit or make satisfactory return is used.  The mult-product firm is in a much better position to follow such practices than a single product form as it can cover small losses on some products in the remainder of the lone.
2. Minimization of loss: pricing is another case of pricing below cost, in high fixed cost industries, idle plants are excessivel costly. If by reducing prices, the plant can be utilized, any contribution to fixed cost reduces losses. The firm may set prices which are below total costs but not below average variable cost.

The price decision maker should recognize the fact that the number of prospective as well as the existing firms in the industry has a fundamental impact on the degree to which a firm has discretion.

 

• STATEMENT OF PROBLEMS

The different between total cost and revenue is the profit or loss.  Revenue is the product of the unit selling price and the quantity produced, therefore, cost and price are the basic factors in determining whether an organization make a profit or loss.

It has been observed that the failure of many products in the market is due mainly to inadequacies on the part of management, to apply cost information in arriving the market price of such products.  Management decision are usually based on information and the failure/ success of any management lies in its ability to take accurate decision, therefore, it implies that the ability of the management to understand, interprets and apply information appropriately is the secret of any successful organization.

 

• OJECTIVES OF THE STUDY

This study titled “cost information and price determination” is geared towards the solution of the problems encountered by management in pricing and marketing their products, due to inadequacy, misleading or failure to use accounting information.  this research therefore intends to provide several cases and simulations and through proper analysis of these, we will avolve the best methods of analyzing product costs to obtain adequate information, necessary for good pricing policy.  Among other things, the project intend to:

1. Highlight on management’s inadequate concern over proper pricing guide via costing information.
2. X-ray necessary conditions for costing system

• Evaluate the appropriate basis of preparing the cost of products.

1. Dissect and analyse the elements of cost involved in the brewing of beer and the extent to which the cost or price of beer is being influenced by the actual cost of production.
2. Know other factors at play in the determination of the price of beer through the idea of the actual cost figures involved.
3. See the practical application of the principles enumciated by cost accounting and to determine any shortfall in its application and if fully applied the advantage thereto.

• Research into the existence or usefulness of cost information, by appraising the existing principles both as they exist in theory and as they are practically applied, to formulate some other efficient wages of determining price through costing information, especially as it concerns a beer industry.
• Determine an appropriate condition and environment for proper collation and analysis of costs.

 

 

 

• RESEARCH QUESTIONS

1. How is the cost information generated by the accounting system applied in arriving at the selling price of a product.
2. To what extent does the management of an organization make use of cost accounting information in determine the price of its products.

• RESEARCH HYPOTHESIS

1. HO: Pricing decision is a function of costing information

HI:     Pricing decision is not a function of costing information

2. HO: The price of a product is determined by market price

HI:     The price of a product is not determined by market forces.

 

• SIGNIFICANCE OF THE STUDY

The essence of cost accounting information comes to mind when one realizes that in the modern world of rapid industrialization, no firm can survive without properly costing its products.

Proper cost accounting – collection of costs, interpretation of costs, analysis of costs, its allocation and control, is the mother of efficiency and any firm that does not know its information as regards costs, stands the chance of pricing itself out of the market.

In a face market economy, particularly in an industry where homogeneous goods are being produced, the greatest weapon which a firm can use against its opponent is to maximize efficiency and this is active through proper costing.  Even if price ceitin exists, the firm will still be in a position cost without equivalent reduction in price leads to increased profit.

Even in periods of slump and low prices proper costing information assists a firm to produce at a price which will cover its varible costs and part of its fixed costs and thereby reducing the loss due to excess capacity.

The essence of cost information as it affects price comes readily to mind when we consider it in relation to the government, we should looked at it from two area:

EXCISE DUTY: This is a sort of tax paid to the Nigerian customs and excise department on goods manufactured in the country.  This duty varies with level of production.  The effect of this on output is glaring as it must be paid, whether sales are made or not and whether or not, profit is made.

1. TAX BASES ON THE REPORTED PROFIT:- this tax is not only important to the government, because of the fund generating but also as one of its tools in the control of the whole economy in the form of fiscal policy.  The more costs are immunized based on information garried, the high profit will be and thus, a positive increase in government tax.  Where there is a high fixed capital costs, using the actual cost figure to determine price will make it so exorbitant and leads to decrease sales, it cannot halt production otherwise it stands to lose so much.  The firm can produce  and sell below total cost with the knowledge of the proportion of the variable cost to the fixed cost.  However, this condition can only arise when there is no other alternative way to channel the resource or a particular product in one of a form’s many lines of products in which the particular product is being produced not for its own profit but to help maintain other lines of product or the finished goods will reach and it becomes marketable (split-off-point) but might need further processing or refinement.  Cost information aids the firm to know whether it is profitable to process further or to sell at the split off stage.  Other significance of the study includes.
2. To create the awareness of benefits derivable from proper data analysed with modern costing technique especially as it affects our case study where adequate cost classification is lacking.
3. To dissvade the use of the “market watch department” as the pricing guide to some manufacturing industries especially the beer industry in which our case study, the Nigerian breweries plc is not exempted.

 

• BACKGROUND OF THE FIRM STUDIES

Nigerian Breweries plc, the pioneer and largest brewing company in Nigeria, was incorporated in 1946 and recorded a landmark when the firs bottle of star larger beer rolled off the bottling lines in its Lagos brewery in June 1949.  this was followed by Aba Brewery which was commissioned in 1957.  Kadun Brewery in 1963 and Ibadan Brewery in 1982.  in September 1993, the company acquired its fifth Brewery in Enugu.  On April 9, 2001, it laid the foundation for yet another brewery in Enugu which was completed recently (Last year).  From its humble beginning in 1946, the company now have six operational breweries from which its high quality product are distributed to all parts of this great country.

Nigeria Breweries plc has a rich portifolio of high quality brands namely:- star larger beer (1949), Gulder large bee (1970), maltina (1976) which now has four varieties (Maltina principle, Legand extra stout 91992), Amstal malta (1994) and schwepper range of carbonated soft frinks launched in 1996 (Schweppes Bitter lenon, shweppes tonic water and schwappes soda water).  This was followed by the launch of crush orange in November 1997, and Schweppes principle in October 1999.

The company has earlier launched in the Nigerian market Heineken larger in June 1998.  however, in August 2001, the company decided to exit the car-Bonated soft drinks market because of the need to concentrate on its area of core competence, the Schweppes franchise was therefore sold off.

Nigerian Breweries plc keeps place with key international developments thus, ensuring that its systems, processes and operational procedures is always in conformity with the world class standards.  It is in line with this policy that the company established a research and development center in 1987, to enhance its research activities on all aspects of brewing operation.

The company in 1994 established an education trust fund of #100 million, to take more active  part in the finding of educational and research facilities in higher institutions.  Nigerian Breweries plc is the foremost sponsor of sports by variety in the country with sponsorship covering footsball, talole tennis, lanon tennis, cyching, chess, glp, badminton, boat racing and ayo.  The aim is to develop Nigerian sportsman one woman to participate in national and international sports and boost the sports profile of the country.

The Nigeria Breweries plc bought the assets of Diamond Brewery in semptember 1993 and fulfilled its desire to have a brewery in Enugu.  Their aim is to improve the company’s service to its costomers in Enugu axis.  There exist within the organization, three categories of labour:  the management, the senior / staff and the junior staff.

 

• DEFINITION OF TERMS

1. ACCOUNTING: Accounting is defined as the application of book keeping technique using professional knowledge and skill in preparing information regarding business transactions.
2. COST ACCOUNTING: Cost accounting can be defined as that aspect of accounting which deals with ascertainment of costs of products and services and comparing these costs with the resultant benefits or services in order to arrive at either profit or loss.

OR

The application of accounting and costing principles, methods and techniques in the ascertainment of cost and the analysis of saving / or excesses as compared with previous experience or with standards.

3. MANAGEMETN ACCOUNTIN: Management accounting can be defined as the application of cost accounting method , principles and techniques, professional knowledge and skill in order to provide information for the management for decision making, planning and control.
4. A COST: This may be defined as the amount of expenditure (actual or notional) incurred on or attributable to a specified activity or transaction.
5. INFORMATION: Information may be defined as knowledge gained or idea obtained from news, strong, discussion, transaction or through the analysis of collected data.

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