1.

INTRODUCTION
1.1. Background of the study

Product costs are costs of resources used to produce product. This cost incurred by a business
when manufacturing a good or providing a service. Production costs combine raw materialand
labor. To figure out the cost of production per unit the cost of production is divided by the
number of unit produce. A company that knows how much it will cost to produce all items it will
have a clear picture at how to better price the item and what will be the total cost to the company.
This production cost can be used to compare the expense of different activities within the
company (Hilton and Moher 2000).

Organizations use different measuring devices are formed to manage productive process
effectively and to generate customer value and profit through the right tools which can assist the
company in accounting for variety of aggregated costs and in the development of competitive
pricing strategies based on informed decision. So, cost accounting system along with other
accounting system provides information, in cost determination measurement and product costing.
As well as managers rely on product costing information for the decision of making profitable
operations in their production process and pricing strategy.

Therefore, In this paper an attempts will have to study one of the product costing and pricing
system Nazerat textile share company. The company is private manufacturing company which
produce different garment product. The company proper product cost information has a sensitive
value of for pricing of the company products to be competitive in the market were they are
distributed.

So, The researcher will conduct in order to identify that how choosing correct cost system can
affect company decision and how the cost department record and allocate this cost data .
1.2. Statement of the problem

Achieving profit objectives and successful competition predicated on the knowledge of accurate
production costs data. Having, this proper cost data can help the companies in order to planning
profit by means of budgets controlling cost, measuring annual or predict profit, including
inventor costing assisting in establishing selling price and pricing policy. An distorted effective
system to measure products cost must be identified and assigned to product in order to avoid cost
complex (Math and curry,1972). When most companies manufactured a narrow range of product
the production cost would be traced easily to individual products. But the problem will occur
when the companies producing and selling multiple pro ducts which arise from allocation of over
head cost to different products by one base especially by labor hour or machine hour can cause
product cost complexity that used traditionally (Cooper and kaplan 1988). So these cost
complexes which arise from allocating factory over-head cost by burden rate on direct labor or
machine hour. So, selection of the correct basis for applying over-head cost is at most
important If a cost system is to provide proper and accurate cost information .The result of cost
accounting system that the organization follow is traditional cost accounting system it may led to
bad cost information which arise from allocation of increasing over head cost on burden rate on
labor hour or machine hour which result bad pricing and product mix strategy when the
companies selling and producing multiple product. Bearing this in mind, that the researcher
will stand to assess how costing system can affect the company decision making process. So, the
research wants to put empirical solution and recommendation to this problem and addresses the
following basic research questions. . .

1. What kind of costing system does the company use?

2. How thecompany allocates its over- head cost?

3. Does product costing system provide correct information in order to make pricing decision?

4. How the companies’ product costing systems provide correct information in order to make
optimal decision?
1.4. Objective of The study

1.4.1. General objective

The general objective of the study is to assess the product costing and pricing system of Nazerat
textile Share Company and provide possible recommendation to problem.

1.4.2. Specific Objective

• To assess the costing system they use.

• To assess the overhead cost allocation.

• To see whether costing system is used as a guide for pricing decision.

• To know whether the company's product costing system provide correct information in
order to make optimal decision.

1.5. Significance of the study

The result of the study will be use full primarily for investor, outsiders, manufacturing
companies and society at large. On the other hand, it also believed that the result of our research
will have an important impact for the company as an attention directing to form and follow-up
the right way of costing and pricing strategies in the company. Beside there, the findings of the
study can pave the way for other researcher who wants to conduct a detailed research regarding
the issues.

1.6. Scope of the study (delimitation)

The overall scope of the study will focus on the extent to which the research objective is conduct.
To avoid discrepancies, ambiguity, misunderstanding and other related problem in conducting
the research. The study will give consideration to limit the product costing and pricing system of
Nazerat textile Share Company. Because the researcher will use to limit the research works do
not vast.
1.7 Limitation of the study

In doing this research paper the researcher face the following problems shortage of clear
information from different respondent lack of experience and skill on conducting research on the
side of researcher and lack of a reliable organized data collecting this study.
 2. Review of Related Literature

2.1 Definition of cost and cost Accounting

Cost is defined as resource scarified or forgone to achieve a specific
objective. It is the amount of expenditure incurred on or attributable to a
given product or service referred to as cost object. A cost object is any
activity for which a separate measurement of cost undertaken, it would
include a product, service, a sales region or other identifiable activity (G.
Foster, 2003, P-28)
Cost Accounting is the field of accounting that measure, records and report
information about cost represented in the accounting system by out lays of
cash, promise to pay cash in the future and expiration of the value of an
asset. These include the cost of inventory, the cost of increasing sales
volume and cost saved from energy efficiency equipment. (Edward and
Michael, 1991, P.77)

Thus cost Accounting is used to indicate the tendency of costs to make a

choice among the elements. This will enable to control the over all costs and
help the firm to cope with prevailing competition of similar procedures
specially in manufacturing organization. (Edward and Michael, 1991, p-77-
78).

2.2 Classification of Costs

There are different methods of classifying costs depending on the purpose in
which the information is to be used, similar costs are grouped to aid
managerial decision making and to produce the analysis necessary for external
financial reporting cost items can be similar to one another in several different
aspects, the particular classification depends on the purpose of grouping costs
together. Costs can be analyzed by function, in which case possible function
within organization are manufacturing administration, selling, distribution,
research, etc. The criteria used will depend on the reason for which the
information is being collected.
(N. Arora, 1999, p.77).

2.2..1 Time period for which the cost is computed

Time can be broadly classified in to past and future; cost can also be
classified according to those time periods Horngren, 1994, p.20).
• Historical cost
Are those that were incurred in the past period.
• Budgeted cost
Budgeted costs are those that are expected to be incurred in the future
period
2.2.2. Classification by behavior
Cost behavior describes how a cost changes with time or changes in volume.
• Variable Costs
Those varying proportionally on total as the volume of production or sales
changes
• Fixed costs
Fixed cost remain constant in dollar amount as volume of production or
sales changes
2.2.3. Classification by traceability of prod uct
1. Direct Cost
Direct cost is one that can be economically traced to a single cost object; the
cost object is a unit of finished product.
2. Indirect Cost
Indirect cost is one that is not directly traceable to the manufacturing
product.
 2.2.4 Classification by manufacturing organization
1. Product cost(inventor able cost) or manufacturing cost
Those cost which are necessary for production and which will not be incurred
if there is no production. Those consist of direct material, direct labors and
some manufacture overhead costs. (garrison.11e,2006)

A. Direct Material Costs

Direct materials are those materials which can be conveniently identified with
and allocated to cost units. They are the acquisition costs of all materials that
eventually become part of the object and that can be traced to the cost object
in an economically feasible way. Acquisition costs of direct materials include
freight in charges, sales taxes and custom duties. (T. Horngren, 2003, p-30).

B. Direct Labor Cost

Labor cost is the cost of remuneration such as wages, salaries, commissions,
bonuses, etc. Direct manufacturing labor costs include the compensation of all
manufacturing labor that can be traced to the cost object in an economically
feasible way. Direct labor consists of wages paid to workers directly engaged in
converting raw materials in to finished products. These costs can be
conveniently identified with a particular job or process (T. Horngren, 2003, p-
32).
C. Manufacturing Overhead Costs
The total of all indirect costs is termed as overhead costs, non productive cost,
factory burden, supplementary costs, are all manufacturing costs that are
considered part of cost object in an economically feasible way example include
power samples, indirect materials, indirect Manufacturing labor plant rent.
Plantinsurance, property taxes on plants plant depreciation and the
compensation of plant managers (T. Homgren, 2003, p-36).
 2.2.6 Non-Manufacturing Costs (period cost)
Non manufacturing costs are those costs nor related with the product and
normally referred as periodic costs. These costs can vary so much according to
the organization. The major classification can be administrative expenses,
distribution expenses, research expense, financial costs, etc. under these
classifications there could be sub classifications which would be found in
different categories. Examples could be salary rent, tax, electricity water etc.
(D, Willamson, 1999, p-118).

2.3 Costing Methods

The methods or types of costing system refer to the techniques and processes
employed in the ascertainment of costs. There are different methods of costing
for different industries. The methods of costing to be used in a particular
company depend up on the type of manufacturing and nature of industry. (D.
Willamsan 1999, p-219).

2.3.1 Job Order /Batch Costing System

Job order costing is method of ascertaining cost in those industries in which
goods are manufactured or services rendered against specific order from
customers. A job order cost system manufacturing accumulates costs of
material, labor and manufacturing overhead expense by specific orders, jobs,
batches or lots. Job costing system is a method in which cost object is a unit or
multiple units of a district product or service called a job. Job order costing
system are widely used in construction, furniture, printing and similar
industries where the costs of a specific job depend on the particular order
specification. (D Willamson, 1999, p-220).
 2.3.2 Process Costing System
Process costing is applied in cases where the identify of individual orders is lost
in the general flow of production. In this process the cost object is masses of
identical or similar units of product or service. Industries to which process
costing is applied produce uniform products without reference to the specific
requirements of customers. Example Textile, sugar, paper, shoes plastic
factories chemical industries etc. (N Arora, 1997, p-99).

According to M.N Arora process costing follows the following Procedures.

• The factory is divided in to a number of processes and an account is
maintained for each process.
• Each process account is debited with material cost, labor cost, direct
expenses and overhead allocated or apportioned to the process
• The output of a process is transferred to the next process in the
sequence.
• The finished output of the last process is transferred to the finished
goods account.

A single work in process account may be used by a company that has only one
producing department or continuously produces a single product. On the other
hand departmental work in process accounts are preferable if production flow
through several cost centers or departments separate cost figures for each
process might also be desirable. In manufacturing process. Costing setting,
each unit receives the same or similar amounts of direct materials costs,
directs labor costs and indirect manufacture costs. (T Horngren, 2003, p-277).
According to Charles T. Horngren there are five steps in calculating unit
costs in process costing system. These steps are.
• Summarize the flow of physical units of out put
• Compute output in terms of equivalent units
• Compute cost per equivalent unit
 • Summarize total costs to account for
• Assign total costs to units completed and to unit in ending work in
process.
2.4. Purpose of cost Allocation

Cost is allocated for four major purposes:

• To predict the economic planning and controlling decision effect. Managers with all
organization units should be aware of all the consequences to their decision even
consequence outside of their components part of product or to purchase it from another
manufacture helps to decide on the selling price for customized product or service.

• To obtain desired information cost allocation are sometime made to influence

management behavior and thus promote goal congruence and managerial effort
consequently in some organizational mere is not cost allocation for legal or internal.
Auditing service or internal management consulting service. Because, to management
want to encourage their use in other organization. This cost allocation for such items to
super manager to make sure the benefit of the specified service exceed the cost.

• To compute income and asset valuation cost are allocated to product and project to
measure inventor’s cost and cost of goods sold. This allocation frequently service
financial accounting purpose. However, the resulting costs also are often used by
manager in planning and performance evaluation.

• To justify cost or compute reimbursement. It helps to cost product at after often done
with government defense contact.

2.5. Cost allocation and Benefit

This considers the value of cost allocation in relation to cost and benefit of setting up
administration and maintaining the cost allocation system. Cost managers must realize that not
only are complex cost allocation system in difficult and costly to maintain (WHilton 2000).
2.6. Contribution of product cost data for proper price and product mix strategy

Bad cost information on product costs leads to bad comparative strategy. They can also be
dangers intensified global competition. Therefore the company must recorded product cost data
properly and analysis correctly. It also allocate it properly in order to have a proper price and
product mix strategy which is very important for one’s company services in the market were
they are distributed.

Not only having, but also analyzing product cost data is very essential for one’s company to
make important decision, project price and production mix strategy.

2.7. Cost flow in manufacturing firm

Cost accounting in manufacturing firm consists of system that is concerned with precise
recording and measurement of cost element as they originate and flow through the productive
process. The manufacturing process and the physical arrangement of the factory are the basis for
determining cost accumulation procedures. There are so many accountants that describe the
manufacturing operations such as material, payroll, factory over head control, Work in process,
finished goods and cost of goods sold. These accounts are used to recognize and measure flow of
cost in cash fiscal period from the acquisition of material, through factory operations, to the cost
of product sold. In the textile share company case such accounts are also utilized in the cost
accounting systems.

2.8. Cost Accumulation Procedure

Cost accumulation is the collection of cost data in an organized way. There are two methods of
utilizing or accumulating costs. These are job order costing and process costing.

Job order costing system is one of a cost accumulation procedure that assigns costs to
specifically identifiable project. Under a job order costing system, all cost associated with a job
are placed in the work in process account as work progresses, and cost remain until the entire job
is complete. When the job is complete all cost assigned to the job are transferred from finished
goods inventory to cost of good gold .According to (T.horgren 1990 page 98).job order
accounting methods are used by companies whose product are readily identified by individual
unit or batch each of which relives varying degree of attention and skill industry which
commonly use job order methods include constriction, printing, aircraft, furniture and
machinery.

Job order costing system has several variations. Such variations are: actual job orders costing all
jobs are charged with an actual direct material, direct labor and factory overhead cost. Such
costing system is subject to the limitation of being on time that will be used for setting selling
price. Normal job order costing system Assign actual direct material and direct labor cost to each
job and a predicted factory overhead cost will be used to serve as a factory overhead cost. Such
costing system will avoid the limitation of actual costing system (O. Cherrington, 1994, ).
In a standard job order costing system each job is assigned with a standard direct materials,
standard direct labor, and standard factory overhead costs predicted before the production
process begins.

Process costing system is also one of the cost accumulation procedure which assigns cost to units
of homogeneous product as the unit pass through one or more production process. According to
(Morse &Roth page 103) process costing systems are applied for such industries as conning,
chemical processing, food processing grass, metal manufacturing, paper making, and petroleum
refining ,textile manufacturing.

2.9. Price model in manufacturing firm

Many pricing models in manufacturing firm are based on cost plus prices model which is the
most popular and easy to understand. A very simple and widely used cost based pricing model in
manufacturing firms is known as cost – plus pricing with a cost – plus a certain amount or
percentage is added to the product cost to determine its selling price and there are also other
pricing system that are follows by some companies like

• Setting a price based on market

• Setting a price based on competent price are some of the method that company use to get
there product price.

Price is the only element in the market mixes those product revenues; all other element
represents cost. Price is the most flexible element of the market mix. (Hilton, 1997, )
.
2.10. Factors affecting pricing decisions

Pricing decision is affected by internal company factors and external environmental factors.

Internal factor affecting pricing decision

It includes marketing mix strategy, cost, and the cost system they fallow.

COST

Cost is the floor for the price that the company can charge for its product. The company wants to
charge a price that both cover all its costs for producing, distributing, selling the product, and
deliver a fair rate of return for its effort and risk. A company’s cost may be an important element
in its pricing strategy. Many companies work to become the low cost producer in their industry.
Companies with lower cost can set lower price that result in greater sales and profits. Tow kind
of cost, fixed and variable. Fixed cost is costs that do not vary with production or sale level. For
example, machinery cost, interest cost. Variable cost varies directly with the level of production.

Cost system they fallow

Most company selling multiple product are making important decision about pricing based on
distorted cost information what is worse alternative information rarely exists to alert these
company that product cost are badly fallowed. Most companies detect the problem only after
their Competitiveness and profitability have deteriorated (Cooper and Kaplan, 1988).

External factor affecting pricing decision

There are so many external factors affecting pricing decision such as;

Competition cost, price, and offers

External factor affecting the company pricing decision is competition’s cost and prices are
possible compactor reaction to the company own pricing moves. The company pricing strategy
may affect the nature of the completion. A low price, low margin strategy, however may stop
competitor or drive them out of market.
There for, company need to bench mark its cost against its competitors cost to learn whether it is
operating at a cost advantage or disadvantage.

Demand and market

Before setting price, the company must understand the market or the relationship between price
and demand for its products. Where as cost set the lower limit of prices. The market and demand
set the upper limit.
2. Methodology of the study

2.1 Research design

The objective of the study is to investigate the costing system and pricing strategy fallowed by
Nazerath textile Share Company. It is a plan of collecting and analyzing data in relevant manner
for the purpose of conducting this study and we will come up with more satisfactory solution to
the problem. We have to use non experimental survey design technique in the research and we
will use descript studies this specific research problem.

2.2 source of data

The objective of the study is to investigate the costing system and pricing strategy of the
company by collecting data from the companies selected department. The researcher will collect
data from both primary and secondary sources.

2.3 method of data collection

The primary data will collect using questionnaire to the employees of the company and
secondary data will be collect from annual expanse summery report of the company. In our
collection we use both qualitative and quantitative data.

2.4 method of sampling

There are two types of sampling technique, but in order to make our studies easy and successful
the researcher will use non probability sampling technique because of individual elementary unit
will not select based on chance, but on personal judgment or purposive sampling. The researcher
will use sample frame from the list of population who were employed in Nazerath textile share
company selected department judgmentally, like the cost department, the marketing department,
finance department and management offices of these selected strata . Based on this we draw the
sample frame.
2.5. Data Analysis and interpretation

After the necessary data will be collected, the data will be gathered in way that each elements
issues include in the study will addressstatically description response will be presented in
relation to the questioners raise both qualitative and quantitative description will analyzed and
interpreted through percentage and table.
4. Work plan

4.1 Time budget

The study would be last for five months in the year 2013/2014. The table gives when each of the
important case will be completed and also shown the weak requirement along with the size of the
research phase.

Description of JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY

Activities

Observation and XXXXX XXXX

discussion with
research groups

Literature review XXXXXXX

Design data XXXXX

gathering
instruments

Primary data XXXXX XXXX

collection

Secondary data XXXX

collection

Data processing XXXXX

Data analysis and XXXXX

interpretation

Submission of XXXXX
draft research
report

final writing XXXX

Submission of XXXX
research and
defense
4.2 cost budget

NO DESCRIPTION QUANTITY UNIT COST TOTAL

1 Paper 500 90 90

2 Pen 6 4 24

3 Binding 7 21

4 Writing and 60 pages 5 300

printing
5 Transportation 30

6 Internet 20 35
cent/minut
7 Telephone 35 35

8 Others 160 I60

Total cost 720

Reference

-M.N Arora, 2007, cost accounting, 11ed,Delhi , India

-COOPER, R and KAPLAN, R.S., 1988a, Management Accounting, 69, 20-27. .

-DRUCKER, P.F., 1954, the practice of Management (New York; Harper and Row).

-EDWARDS, R.S., 1973, cost accounting. First Published in J.Plant(ED).

-GARRISON, 2006, managerial accounting 11ed,Delhi,India

-GOLDRATT, E.M., 1990, cost management (Croton-on-Hudson, New York: North River

Press).

-HORNGREN, C.T., 1962, Cost Accounting, 11edition :( Englewood cliffs, NJ: prentice-hall).

-MNARORA, 2003, Cost Accounting principle and practice, 8thediton, VIKAS Publishing House

-WILL AMSON, 1996, cost accounting, practice-hall of new delhi ,India

RESEARCH PROPOSAL ON ASSESMENT OF PRODUCT COSTING AND PRICING

SYSTEM IN CASE OF NAZERATH TEXTIL SHAR COMPANY
 ADAMA SCIENCE AND TECHNOLOGY UNIVERISTY

SCHOOL OF BUSINESS AND ECONOMICS

A senior research proposal submitted in partial fulfillment for the requirement of Bachelor
of Art Degree in Accounting and Finance department

BY: ABEBE TIBEBU

ABDI NASSIR

ADVISOR: MEKONNEN SHIFERAW

Date: MARCH

Adama, Ethiopia

Table of Contents
Contents page

1. Introduction………………………………………………………………….............................1

1.1. Background of the statement…………………………………………...................................1

1.2. Statement of the problem…………………………………………………..............................2

1.3. Objective of the study……………………………………………………...............................3

1.3.1. General objective..........................................................................................................3

1.3.2. Specific objective..........................................................................................................3

1.4. Significance of the study...........................................................................................................3

1.5. The Scope of the study (Delimitation)......................................................................................3

1.6. Limitation of the study..............................................................................................................4

2. Review of Related Literature………………………………………………………………… 5

2.1. Definition of cost and cost accounting………………………………………………………..5

2.2. Classification of cost………………………………………………………………………….5

2.2.1 Classification by time period………………………………………………………… 6

2.2.2 Classification by traceability of product………………………………………………..6

2.2.3 Classification by manufacturing organization ………………………………….. 7

2.2.4 Classification by non-manufacturing organization…………………………………. 8

2.3 costing method…………………………………………………………………………… 8

2.3.1 Job order costing system……………………………………………………............... 8

2.3.2 Product costing system……………………………………………………………….. 9

2.4. Purpose of cost allocation…………………………………………………………. 10

2.5. Cost allocation and benefit…………………………………………………………. 10

2.6. Contribution of product cost data for proper price and

Production mix strategies……………………………………………………………. 11

2.7. Cost flow in manufacturing firm……………………………………………………….

11

2.8. Cost accumulation procedure ………………………………………………………… 11

2.9. Price model in manufacturing firm…………………………………………………… 12

2.10. Factor affecting price decision……………………………………………………… 13

3. Research design and Methodology................................................................................. 13

3.1. Research design................................................................................................. 15

3.2. Source of data..................................................................................................... 15

3.3 method of data collection..................................................................................... 15

3.4 method of sampling...................................................................................................... 15

3.5 methods of data analysis and interpretation ............................................................ 16

4.Work plan………………………………………………………………………………. 17

4.1Time budget....................................................................................................... 17

4.2 Cost budget......................................................................................................... 18

.Reference.......................................................................................................................... 19
]