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The influence of contextual factors on cost system design and pricing decisions : a study of UK companies in the food processing and other industries

Al-Hussari, Huda (2006) The influence of contextual factors on cost system design and pricing decisions : a study of UK companies in the food processing and other industries. Doctoral thesis, University of Huddersfield.

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    In an attempt to provide a better understanding of product costing system design, this study utilises the
    contingency theory approach to investigate the contingent relationships between several contextual
    factors and the design of product costing system simultaneously. This study also investigates the
    contingent relationships between several contextual factors with the importance of cost-plus pricing, and
    the mediating effect of the importance attached to cost-plus pricing on the relationship between
    contingent factors and product costing system design. In addition, this study investigates the implications
    of fit, internal consistency or coalignment between the contextual factors and product costing system
    design on organisational effectiveness. This study also seeks to develop a wider and more comprehensive
    view of product costing system design than the approach that has generally been used by previous studies
    (i. e. classifying costing systems by two discrete alternatives, either traditional or ABC systems).

    In addition, in today's competitive environment comprehensive product cost systems should provide
    increased accuracy for managerial decisions concerning products, pricing and discontinuing and/ or
    reengineering existing products. In markets where there is a generally accepted market price, firms have
    limited power to make pricing adjustments. Undoubtedly firms have to decide which products to sell and
    to determine the target product mix. Therefore, undertaking periodic profitability analysis is of vital
    importance. In the more common situation, where the market price is not given a priori, cost-plus pricing
    may be used whereby an appropriate percentage mark-up is added to the estimated cost to determine the
    proposed selling price. Therefore where cost information is used for cost-plus pricing decisions accurate
    cost information is likely to be crucial. While there is a substantial literature on costing systems, far less is
    known about the use of cost data in pricing decisions and profitability analysis. A distinguishing feature
    of the research is that it provides a contribution to the research literature on the understanding of the role
    that cost information plays in determining the selling prices and profitability analysis.

    A cross-sectional survey employing a questionnaire method of data collection was adopted. A total of 152
    usable responses were received representing a response rate of 17%. For purposes of analysis, the
    research utilises descriptive statistics and structural equation modeling (SEM) multivariate statistical
    techniques enabled by EQS 5.7 version software (Bentler, 1995). Thus, this study is one of the first
    studies in product costing systems and cost-plus contingency literature to utilise SEM for validating the
    research constructs, controlling measurement error and for testing the structural relationships between the
    constructs simultaneously. Also, this is the first study to investigate and compare product costing
    practices in a single industry (i. e. the food industry) with the other UK industries, and therefore,
    examining and controlling to some extent for industry effects for the observed practices.

    The results of the descriptive analysis show that direct costing measures are extensively used for costplus
    pricing and profitability analysis purposes. Other absorption costing measures are also used but to a
    significantly lesser extent. Despite the popularity of the cost-plus pricing approach, only 50% of the
    companies report using it in their price setting with emphasis being more given to market factors such as
    competition and demand. The findings also emphasise that analysing the profitability of products and
    services at periodic intervals is considered to be a vitally important task. The results of structural equation
    modelling suggest a strong support for the influence in determining selling prices, importance of cost
    information, aspects relating to the intensity of competition, and the extent of the use of total quality
    management have a significant influence on the level of cost system sophistication. This research also
    provided insightful findings relating to the effectiveness of sophisticated costing systems. The results also
    indicate that market share, customisation, the influence in determining selling prices, aspects of
    differentiation strategy, intensity of competition, and the importance of cost information influence the
    importance of cost-plus pricing. Finally, this study contributes to the literature by utilising the structural
    equation modelling method, which has several advantages over other multivariate data analysis.

    Item Type: Thesis (Doctoral)
    Additional Information: EThOS Persistent ID
    Subjects: T Technology > TP Chemical technology
    H Social Sciences > HD Industries. Land use. Labor
    Schools: The Business School
    Depositing User: Graham Stone
    Date Deposited: 22 Oct 2009 17:35
    Last Modified: 28 Jul 2010 19:48


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