THE EFFECTS OF OVERHEAD COST IN THE SELLING PRICE OF A PRODUCT.

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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
CHAPTERONE: INTRODUCTION
1.1 Background of the study 4
1.2 Statementof 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
CHAPTERTWO: REVIEW OF RELATEDLITERATURE
2.1 Conceptual/Theoretical Framework 11
2.2 TraditionalOverheadCost ApportionmentMethod 13
2.3 Activity-BasedCosting Method 14

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2.4 Review of EmpiricalStudies 16
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 CostIn The Selling Price Of A Product 17
CHAPTERTHREE: RESEARCHMETHODOLOGY
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
CHAPTERFOUR: DATAPRESENTATION AND ANALYSIS
4.1 Presentation of data 39
4.2 Data Analysis 42
4.3 Discussion of findings 47

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CHAPTERFIVE: 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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Abstract
This 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
automobilemanufacturing firms in Nigeriashould 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 ONE
INTRODUCTION
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.ht
ml) 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

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costs, and insurance for the machinery and other fixed assets used
in production.
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

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the target profit to add to the total cost per unit and, of course, the
acceptance of the selling price by the market.
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

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costs of these various activities via only one activity such as the
production machine's hours.
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.

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1.4 AIMS AND OBJECTIVE OF THE STUDY
The main aim of these study is to investigate the effects of
overhead cost in the selling price of a product. The study also
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
utilities
1. 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.

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1.5 RESEARCH QUESTION
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 STUDY
From 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 STUDY
Delimitations 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.

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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.
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 TERMS
Overhead 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 services
IMF: - International monetary fund

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Cost 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 TWO
LITERATURE 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

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costs which the company incurs, other than the direct costs, for it
to produce the finished products. The costs that can be included 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

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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 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.

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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-
related factors, such as number of direct labourhours, 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.

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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
(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.

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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 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.

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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
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

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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 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 salaries
This 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

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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 supplies
This 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
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 cars
Many 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 costs
This 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.

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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 there are
cases when the two physical buildings may overlap, it is the usage
of the overheads that separates them.
Examples
 Employee salaries
Although 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 equipment
This 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 Facilities

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Every 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.
The rent for factory buildings is considered a manufacturing
overhead
 Rent of Factory Building
Unless 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 Factory
This 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.

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2.6 Overhead Cost and Control
Overhead 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.
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.

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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). 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.

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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). 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 EXPENSES
There are numerous techniques to decrease overhead costs. These
include:
1. Decreasing working capital
2. Implementing total quality management

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3. Controlling sales costs
4. Studying maintenance costs
5. Decreasing transportation expenses
Working 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 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

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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.
 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 employeeefficiencysuch 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.

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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 COSTIN 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.
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.

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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 individualdepartments,
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.
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

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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 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

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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
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

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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.
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
differentoperating 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.

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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 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

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

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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 STUDY
The 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
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.

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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 STUDY
The 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. 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 COLLECTION

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Method 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 METHODOLOGY
In carrying out this research work, there are some problems
encountered which include the following:
- 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.

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- 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 questionnairecontained 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 ANALYSIS
The procedure to be used for the analysis of data include the use
of simple frequency and percentage in table. The method of data
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 1
Where

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F= frequency of response
N= total no of response
The chi-square (x2) is calculated thus
Chi-square (x2) = ∑ (fo-fe) 2
Fe
Where:
Fe= expected frequency
Fo= observed frequency
∑= summation
X2 = chi-square

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CHAPTER FOUR:
DATA PRESENTATION AND ANALYSIS
4.1 PRESENTATION OF DATA
The 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 respondents
Gender Number of
respondents
Percentage
Male
Female
54
26
67.5
32.5
TOTAL 80 100
SOURCE: Field survey, 2016.
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
status
Number of
respondents
Percentage
Single
Married
Divorced
Widow
Widower
76
3
1
-
-
95
4.0
1.0
-
-
TOTAL 80 100
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
respondents
Percentage
18-30
31-40
41-50
51-60
60 and above
71
8
-
-
1
84
10
-
-
1
TOTAL 80 100

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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
80
TOTAL 80 100
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.

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Table 5. WORK STATUS
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

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Above 4
years
10 12.19 100.0
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%
TOTAL 80 100

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agreed that traditional method is used for Apportioning Overhead
Costs to Products, 8% of the respondents are disagree that ABC
method was use most time.
Table 8 Price-setting: how the company arrives at the price
per unit of its product.
Question Number of
respondents
Percentage
Agree
Disagree
Labour 80
0
64%
0%
TOTAL 80 100
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?

48 | P a g e
Question Number of
respondents
Percentage
Agree
Disagree
Overhead cost 80
0
64%
0%
TOTAL 80 100
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.
Question Number of
respondents
Percentage
Agree
Disagree
Close monitoring
Cost reduction
70
10
56%
8%
TOTAL 80 100
SURCE: Field survey, 2016.
agreed that Close monitoring reduces overhead costs and, at the

49 | P a g e
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?
Question Number of
respondents
Percentage
Agree
Disagree
productivity
profitability
40
40
32%
32%
TOTAL 80 100
SURCE: 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.

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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.
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.

51 | P a g e
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.
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.

52 | P a g e
Table 9: what are the Roles and responsibility of costing
department?
On the officer(s) of the company in charge of overheadcosts
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
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

53 | P a g e
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.
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.

54 | P a g e
CHAPTER FIVE:
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY
The 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
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 CONCLUSION
Innoson 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

55 | P a g e
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
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

56 | P a g e
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 significantactivities (costdrivers)
to resource consumption. The organization's IMS 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

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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
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/

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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.htm
l
Roslina, S. (2012, October 19). Interviewed by Zulaikha. Gurun:
Naza Automotive Manufacturing Sdn Bhd (NAM)
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

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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,
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

60 | P a g e
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 ( )
(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 Products
2. How the company arrives at the price per
unit of its product

61 | P a g e
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?

THE EFFECTS OF OVERHEAD COST IN THE SELLING PRICE OF A PRODUCT.

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