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