the effects of overhead cost in the selling price of a product

THE EFFECTS OF OVERHEAD COST IN THE SELLING PRICE OF A PRODUCT. (A CASE STUDY INNOSON

VEHICLE MANUFACTURING CO. LTD NNEWI ANAMBRA STATE)

By

Alex Raji

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TABLE OF CONTENT

Title page i

Approval page ii

Dedication iii

Acknowledgement iv

Abstract v

Table of content vi

CHAPTER ONE: INTRODUCTION

1.1 Background of the study 4

1.2 Statement of the problem 5

1.3 Significance of the study 6

1.4 Aims And Objective Of The Study 7

1.5 Research Question 8

1.6 Scope and limitation of study 8

1.7 Definition of terms 10

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Conceptual/Theoretical Framework 11

2.2 Traditional Overhead Cost Apportionment Method 13

2.3 Activity-Based Costing Method 14

2.4 Review of Empirical Studies 16

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2.5 Types Of Business Overheads 18

2.6 Overhead Cost and Control 21

2.7 The Effect Of Overhead Costs In The Selling Price Of A Product 22

2.8 Steps To Control Overhead Expenses 24

2.9 Features Of Overhead Cost In The Selling Price Of A Product17

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research design 34

3.2 Area of the study 34

3.3 Population of the study 35

3.4 Sample of the study 35

3.5 Method of data collection 35

3.6 Administration and retrieval of instrument 36

3.7 Problems of methodology 36

3.8 Method of data analysis 37

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Presentation of data 39

4.2 Data Analysis 42

4.3 Discussion of findings 47

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CHAPTER FIVE: SUMMARY, CONCLUSION AND

RECOMMENDATIONS

5.1 Summary of finding 51

5.2 Conclusion 51

5.3 Recommendation 52

Bibliography 53

Appendix 65

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AbstractThis study aims to examine the effects of overhead cost in the selling of a product determination in the Nigeria automobile manufacturing industry. Specifically, the study looks at the treatment of overhead costs apportionment from the perspective of the profit making effort of automobile manufacturing firms. The methodology used is interview with staff of one automobile manufacturing company in Nigeria taken as a case study: that is innoson vehicle manufacturing co. ltd in Nnewi Anambra State. The findings of this study show that overhead costs apportionment has significant effect on the determination of “true and fair” selling price of an automobile manufacturing firm, especially as service centres are considered in primary apportionment before their shares are re-apportioned to production centres, using an appropriate method. This study, therefore, recommends that automobile manufacturing firms in Nigeria should adopt the activity based costing method of overhead costs apportionment as it considers service centres of the company together with production centres in fair apportionment of overhead costs, taking into account the percentage of services enjoyed by the production centres from the service centres. This would allow room for fairly accurate determination of total cost per unit of their products, which would ultimately lead to effective pricing decision. Keywords: Overhead costs, Cost apportionment, Activity Based Costing, Selling Price, and Automobile Manufacturing Industry.

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CHAPTER ONEINTRODUCTION

1.1 BACKGROUND OF THE STUDY There are two major types of costs involved in manufacturing firms: direct costs and indirect costs. Direct costs are the costs which can be traceable physically and directly to a product or service; while the reverse applies for indirect costs. Although they cannot be traced directly to the product or service itself, however, it is extremely important to ensure that indirect costs are apportioned accurately, as the amount significantly impacts on the pricing decision of a manufacturing business. Manufacturing has been defined by Business Dictionary in the website (http://www.businessdictionary.com/definition/manufacturing.html) as “the process of converting raw materials, components, or parts into finished goods that meet a customer's expectations or specifications. Manufacturing commonly employs a man-machine setup with division of labor in a large scale production”. Thus, producing automobiles is a manufacturing activity since all the parts are to be combined by machine and labor; passing through a number of stages before producing the finished goods in the form of completed vehicles.

Overhead costs are usually closely related to the factory or production activities out of which goods are produced. But service/performance centres also incur overhead cost which cannot be directly attributed to a particular product. General overhead costs incurred in the course of the activities of production and service centres in a manufacturing firm are to be summed up for fair apportionment to all the centres, as a first step, and then the service centres’ shares re-apportioned to the production centres as a second step, using appropriate methods of primary and secondary apportionment of overhead costs. Examples of overhead costs are water and electricity bills, safety and environmental costs, and insurance for the machinery and other fixed assets used in production.

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Guy (1997) explains that, “choosing the best method of overhead cost apportionment is a topic which has been dealt with many times in management accounting discourse by advocates of different methods which can be used by accountants and controllers to gauge margins and profits”. This supports the fact that the method used to apportion overhead costs plays a crucial role in influencing the pricing decision on a product and the overall performance of a firm, specifically a manufacturing firm that has to consider all costs incurred in determining the selling price per unit of its product.

Overhead costs apportionment is crucial for manufacturing companies from different perspective, especially for profit determination. The challenge of fairly apportioning overhead costs has become very important nowadays since overhead cost is a major player in determining the profitability level of manufacturing firms. This challenge includes adoption of the most suitable method to apportion overhead costs and how the apportionment of these costs will amount to optimum pricing decision and enhance the financial performance of the firm.

Traditionally, primary apportionment of overhead costs is done to all the cost centres (production and service/performance centres), using any of the numerous methods available. For fairness to be ensured, the shares of the service centres overhead costs are to be re-apportioned to the production centres or products based on the percentage services rendered to them, using any of the secondary apportionment methods like Direct method, Continuous allotment method, Step method, etc. As the indirect costs are fairly apportioned to production centres and ultimately to each unit produced, total cost per unit can now be determined since material and labour costs have already been traced. It is then that pricing decision could be scientifically made, taking into account the target profit to add to the total cost per unit and, of course, the acceptance of the selling price by the market.

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Overhead costs apportionment, therefore, needs serious attention from manufacturing firms, especially those in export-oriented countries like Nigeria. Innoson vehicle manufacturing co. Ltd. was selected for the study on The effects of overhead cost in the selling price of a product. in view of the fact that the company bears all the characteristic features of firms operating in that industry. It is hoped that studying the effects of overhead cost in the selling price of a product. In Innoson vehicle manufacturing co. Ltd firm would throw light on how overhead costs are apportioned to all cost centres in the Nigeria automotive industry. This would give room for suggestion on the most appropriate treatment of overhead costs in that industry for better pricing decision.

This project specifically examines the effects of overhead cost in the selling price of a product. The project work is divided into five sections, with the introduction above as its section 1. Section 2 reviews related literature. Section 3 is about statement of the methodology used in the study. Section 4 presents and discusses the results obtained, while section 5 concludes the paper. 1.2 STATEMENT OF THE PROBLEM

Under the traditional method of allocating factory overhead (manufacturing overhead, burden), most of the factory overhead costs are allocated on the basis of just one factor such as machine hours or direct labor hours. In other words, the traditional method implies there is only one driver of the factory overhead and the driver is machine hours (or direct labor hours, or some other indicator of volume produced).

In reality there are many drivers of the factory overhead: machine setups, unique inspections, special handling, special storage, and so on. The more diversity in products and/or in customer demands, the bigger the problem of allocating all the costs of these various activities via only one activity such as the production machine's hours.

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Under the traditional method, the costs of performing all of the diverse activities will be contained in one cost pool and will be divided by the number of production machine hours. This results is one average rate that is applied to all products regardless of the number of activities and the complexity of those activities. Since the cost of many of the diverse activities do not correlate at all with the number of production machine hours, the resulting allocations are misleading.

Activity-based costing is intended to overcome the weakness of the traditional method by having various pools of costs and then allocating each pool's costs on the basis of its root cause..

1.3 SIGNIFICANCE OF THE STUDY Cost control is complex and significant aspects of a

manager's job. Cost control is important because most of the cost savings goes directly to the bottom line. The distribution of overhead costs is vital when the firm has more than one product or activity or more than one department (area of business). Allocation of overhead costs is also more significant when company is considering adding, dropping, or changing the level of any business action. Overhead cost distribution enables the manager to determine the productivity of a product line, establish the monetary impacts of alternative business plans, and to value inventory. The standard of overhead cost allocation is that overhead costs should be charged to the areas of the firm which indirectly cause these costs to be incurred.

1.4 AIMS AND OBJECTIVE OF THE STUDYThe main aim of these study is to investigate the effects of

overhead cost in the selling price of a product. The study also

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sought to identify effect of the price increase of product on inflation and the distribution of price of other products, to identify its effect on un-employment which lead to less consumption by consumers and ultimately lead to low capacity utilization and stagnate growth of the economy and To learn more about Overhead expenses are all costs on the income statement, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities1. To know the stand standard or methods of collection, allocation, apportionment of overheads to different cost centres and absorption thereof to products or services on a consistent and uniform basis in the preparation of cost statements and to facilitate inter-firm and intra-firm comparison. 2. To know the standardization of collection, allocation, apportionment and absorption of overheads is to provide a scientific basis for determination of cost of different activities, products, services, assets, etc. 3. To know the standard that is used to facilitate in taking commercial and strategic management ` decisions such as resource allocation, product mix optimization, make or buy decisions, price fixation etc. 4. Aims at ensuring better disclosure requirement and transparency in the cost statement.

1.5 RESEARCH QUESTION

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For the purpose of this study, it is important that working research question be formulated. To this end the following research question are hereby proposed:-1. What Method of Apportioning Overhead Costs to Products?2. How the company arrives at the price per unit of its product.3. What are the Roles and responsibility of costing department?4. On how Innoson reduces overhead costs and, at the same time,

maintains the quality of its products.5. What is the Relationship between overhead costs

apportionment and performance of the firm? 1.6 SCOPE OR LIMINTATION OF THE STUDYFrom the topic of research study, the interest is principally limited to the effects of overhead cost in the selling of a product. Using innoson vehicle manufacturing co. Ltd nnewi Anambra state as a case of study.

LIMITATION OF THE STUDYDelimitations are the factors which affect the result of the study. There is hardly any research project without some limitation affecting it in one-way or the other. The limitations encountered during the course of this research are as follow:

I. Collection of Information: There were limitations in getting all the required information needed for the research as some of the information’s where not forth coming due to lack of co-operation and secrecy the part of the respondents.

II. Financial Limitation: There was also financial limitation, because to carry out a research of any kind you need money and being a student my finances are limited.

III. Time Constraints: The time required to get the research done is limited being an academic requirement to finish your studies and research takes a considerable amount of time e.g two years.

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IV. Secrecy: The respondents being questioned were reluctant in giving relevant information needed for the research work. They see the questions being asked as trying to probe them.

Illiteracy: There was limitation of illiteracy on the part of some of the respondent. It is difficult for people who cannot read and write to appreciate the need to supply relevant research information

1.7 DEFINATION OF KEY CONCEPTS OR TERMSOverhead Cost: – Overhead expenses are all costs on the income statement except for direct labour, direct materials, and direct expenses.Products: – In marketing, a product is anything that can be offered to a market that might satisfy a want or need. In retailing, products are called merchandise.Subsidy – Money paid by government to make price lower SAP:- structural adjustment programme GDP:- Gross Domestic product Price: - price is the quantity of payment or compensation given by one party to another in return for goods or servicesIMF: - International monetary fundCost Apportionment: - Apportionment of costs is the process of sharing an organisation's expenditure among/across the individual funding streams / programmes that it implements.Selling Price: - The market value, or agreed exchange value, that will purchase a definite quantity, weight, or other measure of a good or service.-Automobile:- a passenger vehicle designed for operation on ordinary roads and typically having four wheels and a gasoline or diesel internal-combustion engine.

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CHAPTER TWOLITERATURE REVIEW

2.1 CONCEPTUAL/THEORETICAL FRAMEWORK Overhead cost is defined as indirect factory-related cost. It is

a cost that is difficult to trace into the finished products. To exemplify overhead cost, the Management Accountancy website (http://www.managementaccountancy.com/2009/05/overhead-cost-allocation/) asks the question: is it possible to determine the costs of electricity used to produce one ‘can’ of soft drink? But each ‘can’ of soft drink deserves some share of the cost of electricity used in its production! Overhead costs, therefore, need to be treated with caution and seriousness so as to avoid wrong pricing decisions.

An accounting term overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an "operating expense". Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order e.g., wages paid to watch and ward staff, heating and lighting expenses of factory etc. Overheads are also very important cost element along with direct materials and direct labor.

These overhead costs are also known as manufacturing overheads, factory overheads, factory burden and manufacturing support costs. To be precise, manufacturing overheads are the costs which the company incurs, other than the direct costs, for it to produce the finished products. The costs that can be included

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in this group of costs are handling and setting of manufacturing equipment, inspection of the products, maintenance of the machine, factory cleanliness, record keeping as well as monitoring and maintenance of the production line.

Mott (1991) states that, “The easy definition of indirect costs is to say that they are all costs which cannot be identified as direct costs! They are, therefore, costs which cannot be immediately identified with the end product going to customers, but which first must go through some intermediate channelling process”. This means that overhead cost is the cost which can only be traced to the finished products using suitable methods of primary and secondary apportionment.

According to Mott (1991 ), “when a cost can be charged in total to either a cost unit or a cost centre, without first being divided into smaller parts, we say it is allocated”. Costs allocation also can be defined as cost assignment, cost apportionment and cost distribution. All of these terms explain the process of taking a given common cost and dividing it between various cost objects. Three steps are required to allocate costs: first, define the cost objects, second, accumulate the common costs to be assigned to the cost objects and third, choose a method for allocating common costs accumulated in step 2 to the cost objects defined in step 1 (Zimmerman, 2009).

Again, Zimmerman (2009) states that, “cost allocations are quite prevalent in manufacturing. Manufacturers cannot deduct all their manufacturing costs for financial reporting and tax purposes. Rather, they must trace their direct manufacturing costs and allocate their indirect manufacturing costs between units sold and units remaining in inventory”. Hence, for calculating cost of goods sold, net income and cost of closing inventory, financial reporting standards require that indirect manufacturing costs are to be apportioned. Cost apportionment issue also arises whenever a firm has a cost-based reimbursable contract. In this case, the firm’s revenues depend on reported costs, including allocated costs. This shows that selling price of a

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product depends to a large extent on the overhead costs apportioned to the product.

There are several methods of allocating overhead costs to cost centres. In this study, the examination of these methods is restricted to activity-based costing (ABC) method of total cost determination and traditional methods of overhead costs apportionment and total cost per unit determination. 2.2 Traditional Overhead Cost Apportionment Method

A well-established method for allocating overhead costs is the traditional method. Horngren, Bhimani, Foster and Datar (1999) are of the view that the traditional approach of overhead cost apportionment often uses too few pools of indirect costs, so that cost allocations are overly broad averages. The resulting costs may lead managers to make erroneous decisions about pricing or product emphasis. This shows that traditional method does not emphasize on the need to “net” all indirect cost elements; it is concerned only with the few prominent indirect costs like depreciation, electricity charges, water bills, salary of administrative staff, etc.

Additionally, Jamaliah and Maliah (2008) opined that “the traditional accounting approach for primary apportionment of overhead costs is about allocation based on labour hours or machine hours”. The limitations of this method, according to them are that “it rarely reflects the true cause and effect of the relationship between indirect costs and individual products”. Scholars like Bastl, Grubic, Templar, Harrison and Fan (2010) are of the view that the traditional accounting practice is mainly represented by standard costing, which often do not fulfil inter-organisational roles well enough to be considered relevant for decision making support.

Other explanations regarding traditional apportionment are offered by Chan and Lee (2003) who state that in using the traditional costing system, the allocation basis adopted in stage two (secondary apportionment) tend to be dominated by volume-

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related factors, such as number of direct labour hours, direct labour dollars and number of production units. However, these apportionment methods often do not reflect reality. Chan and Lee(2003) are, therefore, uncomfortable with the use of traditional method of overhead cost apportionment, especially using any the methods of secondary apportionment. To them the bases used are mostly subjective and, so, unreliable.

Since, the traditional method is just based on the number of direct labour hours, direct labour dollars and number of production units, there is the danger that it would lead to inaccurate and unreliable calculation of the total cost that is incurred to produce a unit of product. Thus, it is bound to lead a manufacturer to the determination of inaccurate and wrong selling price of the product. This would ultimately affect the overall performance of the business in the short- or long-run. 2.3 ACTIVITY-BASED COSTING METHOD

Gunasekaran, Marri and Yusuf (1999) explain that, “the ultimate goal of ABC as a cost allocation system is to trace the production costs generated by the production of goods or services, as accurately as desired, to the causing activities”. This means that activities are the bases of incurring direct and indirect cost, leading to the total cost of the activities necessary for the production of a unit of product or service. Synder and Davenport (1997), define ABC as an attempt to allocate overhead costs based on the activities that cause overhead costs to be incurred, rather than arbitrarily assigning overhead costs simply because the organisation incurs them. This method is simply about allocating overhead costs based on the activities leading to the production of goods or services.

Guy (1997) is of the view that ABC can be useful in avoiding allocation of charges into the cost of products that are not concerned with those charges. According to Jamaliah and Maliah (2008), ABC is a tool to help allocate overheads with a greater degree of accuracy. ABC has been defined as a method of measuring cost and performance of activities and products

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(Gunasekaran, Marri and Yusuf, 1999). From these explanations, it is clear that ABC is considered to be relatively accurate compared to other methods of overhead cost apportionment.

According to Horngren, Bhimani, Foster and Datar (1999), ABC focuses on activities as the fundamental cost objects. An activity is an event, task or unit or work with a specified purpose. ABC uses the cost of these activities as the basis for assigning costs (direct and indirect) to other cost objects, such as products, services or customers. This is another powerful viewpoint in support of ABC method which emphasizes on allocating overhead cost to the activities that incur them in the course of producing products or services.

Marshall, McCartney, Van Rhyn, McManus and Viele (2010) are of the view that ABC system has led to more accurate costing than older overhead application methods and has supported more effective management of the production, administrative and marketing functions of manufacturing firms. ABC method also makes it easier for performance/service departments to ascertain their running cost, as costing is purely based on activities undertaken.

Mott (1991) suggests that a more valid approach is to accumulate overhead costs not on a departmental basis but on an activity basis. This approach regards activities as incurring costs and products as consuming those activities. This way, overhead cost apportionment is clearly to be consumer (the relevant product) and, so, total cost per unit and selling price determination would not pose any technical problem.

Using ABC method of overhead cost apportionment, a company is bound to improve on its pricing decision making. This is supported by Jamaliah and Maliah (2008), who found that ABC adoption leads to better selling pricing decisions and eventually to an enhanced bottom line for a manufacturing or service organization. Other than that, ABC leads to the accurate calculation of the cost of goods and services as per the finding of Synder and Davenport (1997) that, the primary benefit of using

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ABC is that it ensures more accurate costing and that the related benefit of better costing is likely to be better managerial decisions.

Taking into account the supports ABC method enjoys from scholars and practitioners, whose works are reviewed, it is clear that activity-based costing is the more preferred method for overhead cost allocation/apportionment in the existing literature. This is due to the fairly accurate results that had been argued to be obtained using ABC in allocating/apportioning total cost to units produced. The expected accuracy in total cost per unit determination will lead to convincing selling price determination. 2.4 REVIEW OF EMPIRICAL STUDIES

There are many significant reasons for allocating manufacturing overhead costs to products. In price-setting process of manufactured products, the price should cover all the manufacturing costs, including direct and indirect costs. This indicates that overhead costs must be apportioned accurately to determine a reasonable and competitive price. Furthermore, the products which are yet to be sold, that is., closing inventory should be reported on the balance sheet a part of current assets. It is the requirement of accounting principles that inventory costs are presented in the financial statements; and that closing inventory, as a the balance sheet item must include not only the direct costs, but also overhead costs. Since overhead costs cannot be traceable directly in the products’ physical appearance, there should be a special method to apportion it in order to fairly determine the cost of each product produced by a reporting entity.

Synder and Davenport (1997) argue that: “there are two basic outcomes from allocating overhead cost to units produced: better economic decisions and higher level of managerial motivation”. Horngren, Bhimani, Foster and Datar (1999) mention four purposes for allocating indirect costs: to provide information for economic decisions, to motivate managers and employees, to

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justify costs or calculate reimbursement and to measure income and assets for reporting to external parties.

According to Armistead, Bowman and Newton (1995), the perception of the need to control overhead costs in the different service and manufacturing environments may depend more on the accuracy of accounting systems to measure cost of unit of product than on the nature of the service or manufacturing. The two are, however, linked to some extent. In manufacturing companies, the accounting systems are usually designed to measure cost of unit of product, including overhead cost allocation. While there is debate about accuracy of the traditional accounting process to make overhead cost apportionment as fairly as possible, the process is at the heart of control systems in manufacturing. In pure services, as characterised by professional services, the cost of unit of product is measured, to a lesser extent, by including the overhead allocation (Armistead, Bowman and Newton, 1995). The main control is, therefore, through utilisation of professional fee earning activity. Mixed and quasi-manufacturing service might be expected to lie somewhere between the two extremes of manufacturing and pure service. All of these statements support the importance of fair apportionment of overhead costs. It is clear that overhead cost apportionment is really very important towards the determination of “true and fair” selling price of the products of manufacturing firms. A manufacturing firm should, therefore, chose the most appropriate methods of overhead cost apportionment that is suitable for its circumstances in order to arrive at a fairly accurate selling pricing decision, so as to enhance its sales as well as overall financial performance as a business.

In handling costing system, a manufacturing firm should appoint a dedicated person or team to be in charge of cost centre monitoring and to discharge the responsibility of cost management, especially to accurately overhead cost apportionment to cost centres and ultimately to cost units. Usually, in a manufacturing firm, the person involved in overhead

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costs apportionment and other cost management functions is designated cost accountant or management accountant. According to the Goergetown University website (http://provost.georgetown.edu/MCFO/nav/finmanresponsibilities/costcenter/), the cost manager (cost accountant) is an individual who has been delegated the responsibility for monitoring and reconciling the Cost Centre Status Reports (CCSRs), which suggests that the person in such a position has huge responsibilities to discharge including overhead costs apportionment of a manufacturing firm. 2.5 TYPES OF BUSINESS OVERHEADS. 1. ADMINISTRATIVE OVERHEADS: - Administrative overheads include items such as utilities, strategic planning, and various supporting functions. These costs are treated as overheads due to the fact that they aren't directly related to any particular function of the organization nor does it directly result in generating any profits. Instead, these costs simply take on the role of supporting all of the business' other functions.Examples

Employee salariesThis includes mainly monthly and annual salaries that are agreed upon. They are considered overheads as these costs must be paid regardless of sales and profits of the company. In addition, salary defers from wage as salary is not affected by working hours and time, therefore will remain constant. In particular, this would more commonly apply to more senior staff members as they are typically signed to longer tenure contracts, meaning that their salaries are more commonly predetermined.

Office equipment and suppliesThis includes office equipment such as printer, fax machine, computers, refrigerator, etc. They are equipment’s that do not directly result in sales and profits as they are only used for

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supporting functions that they can provide to business operations. However, equipment’s can vary between administrative overheads and manufacturing overheads based on the purpose of which they are using the equipment’s. For example, for a printing company a printer would be considered a manufacturing overhead.

External legal and audit fees

Company carsMany companies provide usage of company cars as a perk for their employees. Since these cars do not contribute directly to sales and profits, they are considered an overhead. Similar company perks that are a one-off or constant payment such as partner contract fees with a gym will also fall under administrative overheads.Travel and entertainment costsThis will include company-paid business travels and arrangements. As well as refreshments, meals, and entertainment fees during company gatherings. Although one might argue that these costs motivate workers to become more productive and efficient, the majority of economists agree that these costs are not direct contributes to sales and profits, therefore shall be categorized as an administrative overhead. Despite these costs occurring periodically and sometimes without prior preparation, they are usually one-off payments and are expected to be within the company's budget for travel and entertainment.2. MANUFACTURING OVERHEADS:-Manufacturing overheads are all costs endured by a business that is within the physical platform in which the product or service is created. Difference between manufacturing overheads and administrative overheads is that manufacturing overheads are categorized within a factory or office in which the sale takes place. Whilst administrative overheads is typically categorized within some sort of back-office or supporting office. Although

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there are cases when the two physical buildings may overlap, it is the usage of the overheads that separates them.Examples

Employee salariesAlthough the general concept is identical to the example under administrative overheads, the key difference is the role of the employee. In the case of manufacturing overheads, employees would have roles such as maintenance personnel, manufacturing managers, materials management staff, and quality control staff. It would also include the set wages for janitorial staff members. Once again, the key difference lies in the nature of their respective jobs and the physical location in which their jobs are carried out.

Depreciation of assets and equipmentThis refers to the reduction in value of equipment’s as it becomes older and more obsolete. For example, if a printer has a potential useful life span of 5 years, the amount that it can be sold for will decrease each year. Therefore, this value in depreciation is calculated as a manufacturing overhead. Moreover, this also applies to vehicles as they tend to depreciate in value significantly after the first year. When calculating manufacturing overheads, accountants mainly use two methods: straight-line method and declining balance method.

Property Taxes on Production FacilitiesEvery single property unless government owned is subject to some form of property tax. Therefore, the taxes on production factories are categorized as manufacturing overheads as they are costs which cannot be avoided nor cancelled. In addition, property taxes do not change in relation to the business's profits or sales and will likely remain the same unless a change by the government administration.

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The rent for factory buildings is considered a manufacturing overhead

Rent of Factory BuildingUnless the business decides to purchase land and build its own factory, it will be subject to some sort of rent due to the amount of capital required to build a privately owned factory. Therefore, this rent must be paid to the land lord on a regular basis regardless of the performance of the business. Although the rent for the building provides the physical platform for the company to produce its products and services, it is not a direct contributor.

Utilities for FactoryThis would vary depending on how the utility bill is structured. In the case of it being an overhead, the utility bill is pre-negotiated meaning that the monthly utility bill will be the same regardless of the amount in which the factory actually consumes. This will only be relevant in various countries where there is an option for standardized utility bills. However, due to the vast consumption of electricity, gas, and water in most factories, most companies tend to not have standardized utility bills as it tends to be more expensive. Standardized utility bills are also oftentimes discouraged by governments as it leads to wastage of resources and negative externalities of production.

2.6 Overhead Cost and ControlOverhead cost control is used by Small-business owners to

monitor, distribute and reduce their overheads. Expenses that cannot be conveniently identified with a specific product or activity is termed as overhead. Unlike material and production labour, overhead is indirect and invisible part of producing product and service. Overhead costs can include administrative and rent expenses, transport expenses, subcontractors, utilities, office supplies, depreciation, and advertising. And while all these expenses seem normal, it does not mean they are necessary.

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Reviewing the accounting theoretical literature, it has been demonstrated that overhead costs are expenses which cannot be easily recognized with a specific product or activity. Dissimilar to materials and production labour, overhead is an indistinguishable part of the refined product. Yet, overhead is a basic input into the production process just like raw materials. By understanding the nature of overhead costs, it becomes easier for business managers to control these expenses. Proper allocation of overhead costs among products, or departments, allows the manager to understand their firm's production costs. It also permits the manager to verify how much each product or segment of the firm is contributing to overall prosperity. 2.7 THE EFFECT OF OVERHEAD COSTS IN THE SELLING PRICE OF A PRODUCT.

Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.

Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. (The other three aspects are product, promotion, and place.) Price is the only revenue generating element amongst the four Ps, the rest being cost centers. However, the other Ps of marketing will contribute to decreasing price elasticity and so enable price increases to drive greater revenue and profits.

I. Cost control is complex and significant aspects of a manager's job. Cost control is important because most of the cost savings goes directly to the bottom line. The distribution of overhead costs is vital when the firm has more than one product or activity or more than one department (area of business).

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Allocation of overhead costs is also more significant when company is considering adding, dropping, or changing the level of any business action. Overhead cost distribution enables the manager to determine the productivity of a product line, establish the monetary impacts of alternative business plans, and to value inventory. The standard of overhead cost allocation is that overhead costs should be charged to the areas of the firm which indirectly cause these costs to be incurred.

II. The control of overhead costs is mostly complicated. However, by determining direct labour and material expenses it becomes easier, therefore managers tend to focus on these costs. The successful control of overhead costs needs regular attention. Some managers do not believe overhead costs when formulating pricing strategies. This could result in some products or activities not fully recovering their overhead costs. In long term period, unless other products are offsetting this insufficiency, this type of pricing strategy will not give profits to provide a return for the capital, management, and risk involved. It is imperative to recognize the concept of overhead costs when considering changes in the production process.

III. It can be understood that overhead costs are costs which cannot be directly recognized with a product or production activity. Overhead costs can be either fixed or variable. Some examples of fixed factory overhead costs include depreciation, interest, rent, insurance, taxes, advertising, maintenance, and the manager's salary. Variable overhead costs might include some categories of supplies, utilities, communication costs, receiving costs and miscellaneous labour costs. For the small business operation, most overhead costs tend to be fixed.

IV. As mentioned earlier, overhead has a tendency to grow as a business grows. One way to know if these expenses are essential to the business growth is to have a portfolio review process annually (of course, this activity is also overhead).

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Reviewing regularly whether or not a business process, business asset, job function, database system and product line are producing the desired results. Let's say, for example, that you have a group of project managers. Your portfolio review could determine if this overhead activity has been effective. If it has been effective, then they would probably rule that this is a necessary overhead activity. But if there are no projects to manage, or not very many, then they may rule that their time may be better spent doing something else. As the business and circumstances change, so does your overhead needs. For example, if the need to lease an office building changes because of the acquisition of more floors in another office building in a cheaper part of town, then you may want to get rid of that lease, and reduce your overhead expenses.

2.8 STEPS TO CONTROL OVERHEAD EXPENSESThere are numerous techniques to decrease overhead costs. These include:

1. Decreasing working capital2. Implementing total quality management3. Controlling sales costs4. Studying maintenance costs5. Decreasing transportation expensesWorking capital is defined as funds attached in production and

inventories from the time when the unprocessed materials are purchased until the account is collected. When raw materials, inventories and accounts receivable are managed properly, it will decrease the working capital required by the firm and hence the overhead. Since most overhead costs are fixed, increased sales will apparently reduce per unit overhead. It is an aim of every manager to increase sales amount. However, volume is considered as saleable units. Mistakes, reworks and incorrectly filled orders increases costs and decrease saleable units. The payoff from implementing a total quality management system

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may be related to an increase in sales volume. To stay in business world, a firm must be customer oriented. However, it must also control the costs created by sales and promotional activities and use these funds effectively. Managers can decrease sales costs by relating sales incentives to the profitability in contrast to the sales price of the product.

Many accounting experts avowed that it is necessary to develop good and long-run plan for advertising and promotion which can also decrease sales expenses. It has been observed that sales efforts are unpredictable and sometimes fail to accomplish consequential results. A vigilant analysis of sales expenditures may permit reduction and reallocation of sales expenditures while increasing advertising efficiency. Maintenance and repairs are done in order to maintain equipment running. The general objective is to keep equipment in running condition in order to fulfil production goals. Remedial maintenance involves making minor changes in design, materials or construction. Predictive maintenance involves using sensing, measuring or control devices to identify and correct problems before a break-down occurs. Repairs explain maintenance work done to return equipment to production. Preventive maintenance involves work undertaken on a fixed schedule when corrective maintenance is not justified, predictive maintenance cannot be applied and repair maintenance is too costly. Each type of maintenance has its own cost, but few managers fully consider their options to reduce maintenance costs. Recording repairs for each machine is imperative to control maintenance costs.

Small business must control overhead costs by determining the origin point of those costs. An overhead cost analysis can break these costs down into categories and analyse trends in these costs. Main steps are as follows:

Control energy costs: There should be energy efficient products.

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Inventory counts: It is recommended to avoid wrong and unnecessary inventory.

Evaluate insurance such as options, policies and changes. Renegotiate interest terms Renegotiate rental terms Implement quality control system. Re- evaluate sales and marketing costs. Study maintenance costs. Decrease transportation costs. Increase employee efficiency such as outsourcing,

automation and task consolidation. Focus on profit margin. Carefully listen to market and future trends. Ask employees for their suggestion to lessen cost.

Overhead Cost Controlling constituent facilitates company to plan, allocate, control, and monitor overhead costs. It is an important preparation for a strong profitability analysis, as well as for a precise product costing. By planning in the overhead area, company can specify standards that enable to control costs and assess internal activities.2.9 FEATURES OF OVERHEAD COST IN THE SELLING PRICE

OF A PRODUCT.Overhead Cost Controlling is divided into the following areas.1. Cost Element Accounting: Cost and Revenue Element

Accounting details in which costs and revenues have been acquired. Accrual is calculated here for valuation differences and additional costs. Cost Accounting and Financial Accounting are also reconciled in Cost Element Accounting. This denotes that the tasks of Cost and Revenue Element Accounting stretch beyond the bounds of Overhead Cost Controlling.

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2. Cost Centre Accounting: Cost Centre Accounting establishes where costs are incurred in the organization. In order to accomplish this goal, costs are assigned to the sub areas of the organization where they have the most influence.By creating and assigning cost elements to cost centres,

accountant experts make cost controlling possible as well as provide data for other application components in Controlling, such as Cost Object Controlling. They can also use various allocation methods for allocating the collected costs of the given cost centres to other controlling objects.Internal orders: Overhead Orders are internal orders used either to observe overhead costs for a restricted period, or overhead incurred by executing a job, or for the long-term observation of specific parts of the overhead. Internal orders accumulate the plan and actual costs incurred, enabling accountant to control the costs constantly. They can also use internal orders to control a cost centre in more detail and assign budgets to jobs.3. Activity-Based Costing: Activity-Based Costing offers a

transaction-based and cross-functional approach for activity output in which several cost centres are involved. The importance is not on cost optimization in individual departments, but the entire organization. By allocating process quantities based on cost drivers, rather than using overhead calculation, cost allocation along the value chain becomes more source-based. Activity-Based Costing enables management to cost products more precisely in the overhead areas.Some facts about overhead costs are that this cost cannot be

directly traced to products. These are common costs. Overhead costs display drastically different cost behaviour. They comprise fixed, variable and semi variable costs. Overhead costs lack a functional relationship with volume of production. Individual items of overhead costs are not large enough to justify an elaborate control system (Pandey, 2009). Companies in competitive environment make extreme efforts to keep overhead costs low.

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They also face demands to increase resources to develop quality and customer service. Characteristically, a suitably conducted Overhead Review will recognize cost savings of between 20% and 25% of all controllable overhead costs. The main aim of an Overhead Review is to ensure that the services provided are to what customers, external or internal, require, reduce overhead costs to the lowest possible appropriate to deliver the desired service levels, re-balance resources, to support those areas of the business that are critical to its success at the expense of those areas that are less critical.

2.9.1 ABC APPROACH TO OVERHEAD.Service organizations can adopt the ABC system to

segregate the expenses of overhead resources by activities. The system then assigns costs based on the drivers of these activities. This system encourages financial and operating managers to think about the relationship between operating department activities and the G&A overhead resources they consume. If an organization assigns G&A overhead costs to a particular operating department only by the amount of direct labor, it will fail to recognize the widely different demands that individual operating departments make on G&A overhead resources and the disproportionate benefits provided by each G&A department. Service organizations also seek a reduction of overhead costs to make the organization more efficient and/or profitable.

The ABC approach fragments traditional G&A overhead components of cost into groups of activities or overhead pools. It addresses the bias in overhead cost allocation by charging only the portion of G&A overhead to those operating departments that benefit from the G&A overhead activity related to them. These activities may not necessarily correspond to specific functional G&A overhead departments. The accurate partitioning of each G&A overhead department's cost to specific operating departments requires a cost analyst to identify the quantity of each G&A overhead resources which different operating

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departments will consume over a certain time, e.g., one fiscal year. The ABC approach presents an improved methodology for relating a G&A overhead resource costs to operating departments by recognizing that these costs result from a group of activities that affect each operating department's work.

For example, an operating department of a research and development organization routinely requires the execution of contracts with consultants and/or subcontractors to accomplish, on behalf of its various clients, a unique task demanding certain skills not available within the organization. In the process of effecting such execution, this department will benefit from the resources of the following G&A overhead departments: a) Purchasing, b) Contracts, c) Legal, d) Accounting, and e) Executive Management. However, throughout an individual fiscal year this operating department may need the resources of Purchasing or Contracts only 10 percent of the time, based on the ratio of purchase orders or contracts it consumed relative to the total of such orders or contracts processed by the respective G&A overhead departments. Different ratios, of course, would apply to the other G&A overhead departments.

The allocation of either departmental or G&A overhead resources is not directly proportionate to the volume of work in a particular operating department. The nature and complexity of each operating department's activities will determine, to a large extent, the consumption of overhead resources. Measuring the cost of the different key activities associated with service delivery demands the efficient identification and assignment of the costs related to the nature and complexity of each operating department's activities. The ABC system attributes overhead first to these activities and then to the service that creates a demand for these indirect resources.

Consider an example where the ABC approach precisely illustrates the connection between an operating department's activities and their consumption of certain G&A overhead resources. The personnel department of a university performs a

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number of activities, e.g., recruitment, retention, counseling, that create demands for its services. A cost analyst may find that certain operating departments: a) have a disproportionately large number of tenured faculty, b) engage in little research or grant work, and c) experience a very low turnover rate. Those operating departments should not receive the allocation of a G&A overhead department's cost, attributable to the personnel department, based on the amount of direct labor in their department. Their key activities, teaching and some research, do not require the same amount of the personnel department's resources as other operating departments of about the same size that: a) have less tenured faculty, b) perform more research and grant work, and c) suffer a higher turnover rate. Only those personnel department's resources that are expended on specific activities in each operating department should be charged to that department.2.9.2 OVERHEAD AND PRODUCTIVITY. Financial and operating managers agree that it is important to understand the relationship of overhead costs, both departmental and G&A, to their organization's productivity measurement - the ratio of service delivery cost to the revenue or benefit received from delivery of the service. Increasing productivity through cost reduction calls for designing cost-out of the various operating departments that deliver distinct services by examining how overhead is allocated at all levels of the organization. The ABC system can assist these managers by: a) placing overhead components of cost into groups of activities or overhead pools, b) recognizing that overhead cost does not vary with the volume of service delivered, and c) assigning overhead cost to the significant activities in each operating department. Identifying key activities (cost drivers) allows these managers to predict costs and measure productivity performance more accurately. The ABC approach tends to focus attention on managing the actual activities rather than manipulating numbers. Working with activities also fosters an environment of continuous improvement and ongoing cost reduction/avoidance.

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These managers often treat overhead costs as unmanageable and fixed. The ABC approach considers all cost as manageable and variable. Understanding their nature is integral to keeping them under control. G&A overhead departments' costs should be analyzed and assigned to the discrete services performed by the different operating departments. When accurately allocated to such services, they appear as a charge against that department's bottom line, and operating department managers will carefully scrutinize and challenge them. If the uses of certain G&A overhead activities are reduced or eliminated by one operating department, they will continue to act as cost drivers unless these activities are redeployed to other operating departments or reduced in scope. Operating departments should reduce their departmental overhead first by integrating their overhead activities with those of the G&A overhead departments. Mature service organizations, however, have formalized hierarchical structures in both departmental and G&A overhead activities that impede the integration of these activities and affect the organization's productivity. Employing the ABC approach affords the necessary information to recognize the activities that drive overhead costs, and it will provide the tool for identifying candidate activities for integration.2.9.3 OVERHEAD MEASUREMENT.

An efficient cost management system would measure each activity (cost driver), and it would allocate overhead costs to each activity. The ABC system distinguishes itself from conventional cost accounting systems by using different cost drivers to improve the accuracy of the information it generates - an effective measurement of each activity. This measurement would demand a complex and integrated accounting system that would be relatively expensive to develop and implement, since each activity to be measured (costed) could represent an accounting area. Each area, i.e., pharmacy prescriptions filled, contracts executed, and employment applications processed, would have a "charge number." Considerable recordkeeping detail would

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introduce additional cost into the cost management system, and, historically, skilled employees in operating departments dislike maintaining and updating detailed cost records.

A standing problem in allocating overhead costs remains the selection of an acceptable unit of measurement. Cost drivers would need a common bond of identity. The ABC system can reduce the measurement of costs associated with these drivers by selecting cost drivers that use information that is relatively easy to obtain. The requisite information for such drivers may be readily available because a transaction is recorded each time an activity is performed. Each time a pharmacy prescription is filled, a contract executed, or an employment application processed an accounting record is created - especially in those service organizations that have developed comprehensive patient tracking, project management, or personnel record systems. Some service organizations have already implemented computer-based labor and material cost allocation systems. Of course, an efficient and effective information management systems (IMS) department is integral to the successful implementation and maintenance of an ABC system.2.9.4 ABC IMPLEMENTATION.

The amount of time and energy that all overhead and operating departments will consume in implementing and maintaining an ABC system understandably concerns financial and operating department managers, especially those in the Accounting and IMS departments. All departments should understand and appreciate the cause-and-effect relationship between the cost drivers in G&A overhead departments and the activities of the operating departments. Integration and cooperation are necessary to understand this relationship. Widespread cooperation and total organizational involvement are necessary to achieve a sustained commitment that will mitigate a nonreceptive organizational culture associated with the existence

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of formalized hierarchical structures. This commitment demands the full support of the organization's top management.

CHAPTER THREE: RESEARCH METHODOLOGY

This chapter deals with the ways of gathering information that will lead to the possible solution to the research. Every research work requires an effective method through which the needed data could be collected. Osuala (1993) define research methodology as the process of arriving at a dependable solution to a problem through the planned and systematic collection, analysis and interpretation of data.3.1 RESEARCH DESIGN

The approach to be adopted for the study is descriptive method. Descriptive research is basic for all types of research in assessing the situation as a pre-requisite for making influence and generalization.

Descriptive research consist of a set of gathered data or information analyzed, summarized and interpreted along certain lines of thoughts for the pursuit of a specific purpose or study, including the subject matter of this study.

3.2 AREA OF THE STUDYThe study was carried out at Nnewi metropolis, the capital

city of Anambra State in Nigeria, Innoson Vehicle Manufacturing Company (IVM) was commisioned by His Excellency, President

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Goodluck Ebele Jonathan at Nnewi. IVM is part of the Innoson Group of Companies founded by the visionary Chairman, Mr. Innocent Chukwuma, Officer of the Order of the Niger (OON).

IVM introduces automotive products from China, Japan and Germany. It's product line includes heavy duty vehicles, middle and high level buses, special enviroment friendly vehicles. The company carries out optimization design and assembly according to West African road condition so as produce suitable products at affordable prices.

The company also provides good services for repairs and parts supply. All these actions are engineered to meet the customers' special requests, attain the highest possible performance and safety standards and also make the vehicles suitable for the West African market.3.3 POPULATION OF THE STUDY

Population refers to all the member of elements of a particular group of people or things in a defined area. In research the population defines the limits within which the researcher findings are applicable. It is the people or subjects in the geographical areas where the study covers.

The population for this study comprises all the staff of Innoson Vehicle Manufacturing Company terminal the both administrative and operative staff are sum up to the total amount 100 who are direct bearers of the effects of overhead cost in the selling price of a product.

3.4 SAMPLE OF THE STUDYThe target population comprises of all users of Innoson

Vehicle Manufacturing Company, due to limited time and resources, a sample of the total population will be chosen, the sample shall consist of fifty (50) staff picked from stratified random sample among the staff of administration and drivers.

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This will be done with the assistance of the managers of both company’s branch.

However the staff of administration to be chosen will not be more than twenty (20) while the remaining shall be from drivers.

3.5 METHOD OF DATA COLLECTIONMethod of data collection from the respondent will be done through the questionnaire.This will involves personal contact with respondents in their various duty post in the corporation. The completed questionnaire will be collected immediately after been completed.3.6 ADMINISTRATION AND RETRIEVAL OF INSTRUMENT The instrument to be used for the study include questionnaire survey to be designed by researcher and this shall be validated by observation method.The instrument consists of two section (A and B), section ‘A’ deals with respondents personal data such as sex, department, educational qualification, years of working experience special academic etc. section ‘B’ consist of question and items relating to the subject matter of the study to be answered by the respondents by picking either of the alternative to be provided in the columns. This shall be graded in likert sample method of strongly agreed – 20, Agreed -1 5 disagreed – 5, strongly disagreed – 10 and no response – 0 respectively.

3.7 PROBLEMS OF METHODOLOGYIn carrying out this research work, there are some problems encountered which include the following:

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- Lack of resources: Most of the resources at hand during this research are not sufficient for the topic on manpower planning, some are centred on planning generally.

- Financial constraints: Another problems of methodology is lack of finance, some of the place were supposed to go so as to get information like cyber cafe, there is normally to do so and buying of textbooks and other related journey is not possible because of financial difficulty.

- Time factors: The time given to carry out this research is limited, this made impossible for wider consultation with other people on the same topic manpower planning.

Another problem faced during this research is lack of co-operation from the respondents, some of the respondents fail to fill the questionnaire given to them within the time allotted other misplaced their questionnaire.During oral interview some respondents refused to give some information needed for fear of losing their jobs.3.8 INSTRUMENT OF DATA COLLECTION The following instruments was used by the researcher to collect data.QUESTIONNAIRE: Close-ended questionnaires was used for easy responses. The questionnaire contained 15 questions. One hundred sets of questionnaire were sent out and returned correctly completed ones will be analyzed.ORAL INTERVIEW: The research also used oral interview to get more information from areas where questionnaire not covered.OBSERVATION: The investigation will also undertake personal observation in the implementation of manpower planning.3.9 METHOD OF DATA ANALYSISThe procedure to be used for the analysis of data include the use of simple frequency and percentage in table. The method of data

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collection allowed for transformation of quantitative uses in data analysis in as much as the questionnaire were design using likert simple method. Chi-square as statistical tool will be used to test hypothesis. Sample percentage = f x 100 N 1Where F= frequency of responseN= total no of responseThe chi-square (x2) is calculated thusChi-square (x2) = ∑ (fo-fe) 2 FeWhere:Fe= expected frequencyFo= observed frequency∑= summationX2 = chi-square

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CHAPTER FOUR:DATA PRESENTATION AND ANALYSIS

4.1 PRESENTATION OF DATAThe purpose of this study is to investigate the effects of overhead cost in the selling price of a product. A case study innoson vehicle manufacturing co. Ltd Nnewi Anambra state. In order to achieve the purpose of the study, fifty (50) respondent were involved in the instrument designed by the researcher and validated by the supervisor, out of the fifty (50) questionnaire distributed, forty seven (47) were completed, returned and used for the analysis. Three research hypothesis were proposed for the study. Chi-square method of statistical analysis were also employed for analysis. This chapter therefore consists of data presentation, data analysis, test of hypothesis and discussion of findings. 4.2 DATA ANALYSIS Section A

TABLE 1: Gender distribution of respondentsGender Number of

respondentsPercentage

Male

Female

54

26

67.5

32.5TOTAL 80 100

SOURCE: Field survey, 2016.

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The table above shows that 67.5% of the respondents

are males while 32.5% of the respondents are female.

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TABLE 2: Marital status of respondents Marital

statusNumber of


SingleMarriedDivorcedWidowWidower

7631--

954.01.0--

TOTAL 80 100SOURCE: Field survey, 2016.

The table 2 above shows that 95% of the respondents

are not married, 4.0% of the respondents are married and

1% of the respondents are divorced. It also shows that none

of the respondents is a widow or widower.

TABLE 3: Age distribution of respondents Age Number of


18-3031-4041-5051-6060 and above

718--1

8410--1


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The table above shows that 89% of the respondents fall

within the age 18-30 years, 10% of the respondents that

within the age of 61 and above. The table equally show that

none of the respondents fall within the age of 41-50 years

and 51-60 years.

TABLE 4: Educational status qualifications of respondents

Qualification Number of respondents

Percentage

No formal education

FSLC

SSCE

NCE/OND

BSC/HND and above

-

-

5

11

64

-

-

6

14

80TOTAL 80 100

SOURCE: Field survey, 2016.

The table above shows that 6% of the respondents are

secondary school students, 14% of the respondents are

NCE/ND/Equivalent and 80% of the respondents are

graduate and holders of higher degrees.

Table 5. WORK STATUS

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Qualification

Number of respondents

Percentage Cumulative percentage

Top management

16 19.51 19.51

Middle management

34 41.46 60.97

Junior staff 30 39.03 100

Total 80 100.0

Source: Field Survey 2016.

Table 5 shows that 16 or 19.51% of respondents are top management staff, 34 or 41.46.% of the respondents are middle management staff, 30 or 39.03% of the respondents are junior staff. Thus, the survey reveals that most of the respondents are from the middle level and junior cadre.

Table 6. Work experience

Frequency Percentage

Cumulative percentage

Below 1 years

30 39.03 39.03

2-3 years

40 48.78 87.81

Above 4 years

10 12.19 100.0

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Total 820 100.0

Source: Field Survey 2015.

Table 6 shows that 30 or 39.03% of respondents had experience of less than 1 years, 40 or 48.78% had between 2 and 3 years, 10 or 12.19% had over 4 years’ experience. Thus, the survey reveals that most of the respondents do not have more than 4 years’ experience.

SECTION B

TABLE 7: what Method of Apportioning Overhead Costs to Products?On the method used by the company to apportion overhead costs to products, below is the discussion on the internal auditor’s response:

Question Number of respondents

Percentage

Traditional method

ABC Method

70

10

56%

8%



agreed that traditional method is used for Apportioning Overhead

Costs to Products, 8% of the respondents are disagree that ABC

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Table 8 Price-setting: how the company arrives at the price per unit of its product.


Percentage

Agree

Disagree

Labour 80

0

64%

0%



agreed that labour method is used by the company to arrives at

the price per unit of its product, 0% of the respondents disagree.

Table 9: What are the Roles and responsibility of costing

department?


Percentage

Agree

Disagree

Overhead cost 80

0

64%

0%


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agreed that managing overhead cost is the Roles and

responsibility of costing department, 0% of the respondents

disagree.

Table 10: On how Innoson reduces overhead costs and, at the same time, maintains the quality of its products.


Percentage

Agree

Disagree

Close monitoring

Cost reduction

70

10

56%

8%

TOTAL 80 100SURCE: Field survey, 2016.


agreed that Close monitoring reduces overhead costs and, at the

same time, maintains the quality of its products, 8% of the

respondents disagree, that is cost reduction.

Table 11: what is the Relationship between overhead

costs apportionment and performance of the firm?


Percentage

Agree productivity 40 32%

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Disagreeprofitability 40

32%

TOTAL 80 100SURCE: Field survey, 2016.

The table above shows that 40% of the respondents agreed

that productivity is the Relationship between overhead costs

apportionment and performance of the firm, while 40% of the

respondents disagree, that is profitability.

Effective overhead costs allocation definitely enhances the

productivity and profitability performance of the company.

4.3 DISCUSSION OF FINDINGS

Table 7:- Method of Apportioning Overhead Costs to Products On the method used by the company to apportion overhead costs to products, below is the discussion on the internal auditor’s response:

The first question is to look at the significance of choosing the method for apportioning overhead costs. This is because this method influences the costing system of a manufacturing firm.

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From the interview, it is found that innoson vehicle manufacturing co. Ltd, as an automotive manufacturing firm, uses traditional method of overhead cost apportionment. The officer clearly stated that the direct overhead costs are allocated by model and according to standard hours or minutes. As for the indirect costs, the officer mentioned that they are apportioned to all the cost centres, including performance/service centres, as a first step. The service cost centres’ shares of the indirect costs are thereafter re-apportioned to the production cost centres or allocated directly to the units of vehicles produced, based on the percentage services rendered to them by the service cost centres.

From this finding, it shows that innoson vehicle manufacturing co. Ltd uses traditional method of apportioning overhead costs and that the traditional method is still relevant to the Nigeria automotive manufacturing companies, as testified by innoson vehicle manufacturing co. Ltd. It also shows that it is really important for the manufacturing firms to select an appropriate method to apportion overhead costs to all departments or centres, including performance centres, and that the apportionment of overhead costs is not to be done arbitrarily. The important thing to note here is that various methods of primary and secondary apportionment of overhead costs impact differently on the selling price to be determined for the products of the company.Table 8 Price-setting: The respondent was also asked on how the company arrives at the price per unit of its product. Below is the discussion on the response to the question:

Price-setting is very important since it determines the revenue or sales of a firm. It also leads to the profit performance of a manufacturing firm and helps determine whether the firm is doing well or not.

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As for by innoson vehicle manufacturing co. Ltd, the price set for its product comprises the total costs of material, labour, overheads and profit margin. All the costs elements are critically identified and calculated first in order to avoid losses. Then, in order to make sure that the profit of the company is increasing over time, innoson vehicle manufacturing co. Ltd determines a reasonable rate for profit margin according to the quality that the company provides for its products. This is also to ensure the sustainability of the manufacturing firm. The box below illustrates how innoson vehicle manufacturing co. Ltd. derives its selling prices for each of its products.

Selling price = Material + Labour + Overhead + Profit

The overhead cost component in the selling-price determination shows that overhead cost is really important and provides significant impact on the determination of selling-price.

Table 9: what are the Roles and responsibility of costing department? On the officer(s) of the company in charge of overhead costs apportionment, below is a discussion on the internal auditor’s response:

The costing department is extremely important in a manufacturing firm since its major function is to deal with the core activities and business of the firm. The performance of this department will affect the performance of the firm because this is

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where the overhead costs apportionment process is handled and managed.

As for innoson vehicle manufacturing co. Ltd., the persons in charge of the overhead costs are the cost centre managers. These staffs play a crucial role in this automotive manufacturing firm since the overhead costs are controlled and operated by them. Innoson accords high priority to the role of these personnel since the decisions they make in allocating costs will affect pricing decision and the overall performance of the automotive manufacturing firm.

Table 10: Maintaining quality of the product: On how Innoson reduces overhead costs and, at the same time, maintains the quality of its products, and how the two aspects relate to each other, we discuss the response of the internal auditor below:

Innoson has its own system to cater for this. Overhead costs can be reduced by close monitoring on the actual amount incurred by every departmental head. Cost reduction programme is one of the initiatives to evaluate the items/areas that impact overhead costs. Action must be taken to control the impact of, and minimise the increase in, overhead costs. Examples of areas to assess are overtime, wastages and utilities, etc. Quality of the product is not directly related to overhead costs. Apart from trimming the size of labour force and its costs, other procedures such as increased supervision, quality control, and quality of raw materials contribute towards better quality of the products.

This shows that overhead costs apportionment is very useful in fairly determining total cost per unit since it reduces the risk of unfair allocation of indirect cost to cost units, thereby reducing the cost that might be unfairly allocated to a particular product. Costs reduction would lead to increased profits of individual products and this would enhance the overall performance of the company.

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Table 11: what is the Relationship between overhead costs apportionment and performance of the firm?On whether or not effective overhead cost apportionment enhances the performance of Innoson as a company, it is found that:

Effective overhead costs allocation definitely enhances the productivity and profitability performance of the company. The respondent mentioned that effective overhead cost apportionment leads to accurate price-setting, better decision-making and higher maintenance of product quality, all of which are key elements in enhancing the performance of a manufacturing firm, like innoson vehicle manufacturing co. Ltd.

CHAPTER FIVE:SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARYThe study investigated the effects of overhead cost in the

selling price of a product. A case study innoson vehicle manufacturing co. Ltd Nnewi Anambra state. In order to achieve the purpose of the study. Fifty respondents were involved in the instrument designed by the researcher and validated by the supervisor. The chi-square method of analysis was adopted to

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analyze the data obtained from the questionnaire administered. The following therefore represents the summary of the findings.

To summarize, overhead costs are the indirect and sometimes imperceptible costs related with producing a product or service, making sales more exciting than conserving expenses. But both are essential functions of the manager. Overhead costs, should be scrutinized on a consistently. Allocating overhead costs to departments within the company or to products within departments can help the manager to recognize unbeneficial aspects of the business. Break-even analysis can assist the managers to understand the implications of their overhead costs on their required sales volume, sales price or production structure.5.2 CONCLUSIONInnoson vehicle manufacturing co. Ltd. is one of the productive automotive manufacturing firms in Nigeria and the firm shows that overhead costs apportionment is highly relevant to its selling price determination and enhancement of its overall performance. The method best suited to the company’s needs must be selected since overhead costs involve a huge amount of money towards the production of finished vehicles in the firm. The profit of the firm will be negatively affected if the overhead costs are apportioned inaccurately. The total cost per unit of the vehicle produced by the firm is affected by the method chosen for overhead costs apportionment, like wise its price setting. It is the responsibility of the costing department of an automobile manufacturing company to ensure that an appropriate method of overhead costs apportionment is adopted to do accurate apportionment that would ensure accurate selling price determination, so that the overall performance of the company could be enhanced.5.3 RECOMMENDATION

The recommendation that can be made to Innoson vehicle manufacturing co. Ltd. and other Nigeria automobile firms is that

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they should learn to change their overhead costs apportionment system from the traditional method to the ABC method in order to have accurate calculation of the total costs per unit of their products. Furthermore, overhead apportionment using ABC method would enhance the overall performance of the firms, as the selling prices of their products would be determined more accurately and more reliably.

A recommended approach to establishing an ABC system for an efficient allocation of departmental and G&A overhead would consist of the following. First, top management would instill an organization-wide awareness that improvements in the cost management system are possible by examining how the organization operates.

Second, an interdepartmental team, consisting, for example, of representatives from accounting, purchasing, and structural engineering in a research and development organization could be formed to develop an operational model that would enable the organization to monitor the nature, scope, and methods of assisting a particular client. This team would: a) identify relevant activities and organize them by activity center (purchasing), b) search for simple activity cost drivers that relate consumption of activities by operating departments, and c) determine the cost of each activity and assign this cost from the general ledger to a certain activity center (purchasing) and a corresponding cost object (structural engineering). For example, purchasing's costs could be allocated to structural engineering based on a single driver, i.e., purchase orders. This team would increase the awareness of the cause-and-effect relationship between the cost drivers in the purchasing department and the activities of the structural engineering department.

Third, the organization's management can use computer technology to facilitate the identification and recording of relevant costs as well as the application of significant activities (cost drivers) to resource consumption. The organization's IMS

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department can convert this model to an applied ABS system that will permit the analysis of various "what if" scenarios.

BIBLIOGRAPHY Armistead, C., Bowman, C., & Newton, J. (1995). Managers' perceptions of the importance of supply, overhead and operating costs. International Journal of Operations & Production Management, 15(3), 16-28. http://dx.doi.org/10.1108/01443579510080526

Bastl, M., Grubic, T., Templar, S., Harrison, A., & Fan, I. S. (2010). Inter-organizational costing approaches: the inhibiting factors, The International Journal of Logistics Management, 21(1), 65-88. http://dx.doi.org/10.1108/09574091011042188

Chan, S. Y., & Lee, D. S. Y. (2003). An empirical investigation of symptoms of obsolete costing systems and overhead cost structure. Managerial Auditing Journal, 18(2), 81–89. http://dx.doi.org/10.1108/02686900310455065 Gunasekaran, A., Marri, H.B., & Yusuf, Y.Y. (1999). Application of activity-based costing: some case experiences. Managerial Auditing Journal, 14(6), 286–293. http://dx.doi.org/10.1108/02686909910280217 Guy, G. E. (1997). Using improper costing methods may lead to losses. The TQM Magazine, 9(3), 228–230. Horngren, C. T., Bhimani, A., Foster, G., & Datar, S. M. (1999). Management and cost accounting (10th ed.). New Jersey: Prentice Hall Europe

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Jamaliah, A. M., & Maliah, S. (2008). Implementation of activity based costing in Malaysia: A case study of two companies. Asian Review of Accounting, 16(1), 39–55 Marshall, D. H., McCartney, J., Rhyn, D. V., McManus, W., & Viele, D. F. (2010). Accounting: what the numbers mean (2nd ed). Australia: McGraw-Hill Australia Pty Ltd

Mott, G. (1991). Management accounting for decision makers (2nd ed). London: Pitman Publishing.

Retrieved Oct 11, 2012, from World Wide Web: http://www.managementaccountancy.com/2009/05/overhead-cost-allocation/

Retrieved Oct 12, 2012, from World Wide Web: http://blog.accountingcoach.com/manufacturing-overhead-allocated/ Retrieved Oct. 20, 2012, from the World Wide Web: www.nazakia.com.my

Retrieved Oct 31, 2012, from the World Wide Web: http://provost.georgetown.edu/MCFO/nav/finmanresponsibilities/costcenter/

Retrieved Nov 29, 2012, from the World Wide Web: http://www.businessdictionary.com/definition/manufacturing.html Roslina, S. (2012, October 19). Interviewed by Zulaikha. Gurun: Naza Automotive Manufacturing Sdn Bhd (NAM)

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Snyder, H., & Davenport, E. (1997). What does it really cost? Allocating indirect costs. Asian Libraries, 6(3), 205–214. http://dx.doi.org/10.1108/10176749710368389

Zimmerman, J. L. (2009). Accounting for decision making and control (6th ed). New York: McGraw-Hill/Irwin

APPENDIX The effects of overhead cost in the selling price of a product, survey questionnaire.

Afribray Polytechnic Department of Accountancy School of Management Studies Abuja, fct.

Dear Respondent,58 | P a g e

I am final year student in the Department of Accountancy, Afribray Polytechnic Abuja, I am conducting a research study on the above topic. The instrument is designed to obtain your views on the above subject matter. Your objectives response to the items on the instrument will enable the researcher to arrive at conclusions for research purpose. The study is part of the requirement for the Award of Higher National Diploma (HND) in Accountancy I will sincerely appreciate your honest answer to the questions attached here with it is strictly for academic purpose. Your confidentially and security are absolutely guaranteed.Thank you for your co-operation.

ALEX RAJI. Researcher

PART ‘A’Instruction: Please go through the questionnaire bellow and tick your appropriate answers in the spaces provided.1. Sex: (a) Male ( ) (b) Female ( )2. Department: (a) Human resource ( ) (b) Ticketing and booking ( )

(c) Departure ( ) (d) Others ( )3. Educational qualification: (a) S.S.C.E ( ) (b) Diploma/equivalent ( ) (c) HND/BSc ( ) (d) Master and above ( ) 4. Year of working experience (a) 1-2 years ( ) (b) 3-4 years ( ) (c) 5-6 years ( )

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(d) 7 years and above ( ) 5. Specialization (Academics): (a) Business Admin

(b) Engineering ( ) (c) Others ( )

SECTION ‘B’S/N STATEMENT Responds 1 What Method of Apportioning Overhead

Costs to Products2. How the company arrives at the price per

unit of its product

3 What are the Roles and responsibility of costing department?

4. On how Innoson reduces overhead costs and, at the same time, maintains the quality of its products.

5. What is the Relationship between overhead costs apportionment and performance of the firm?

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