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EFFECT OF OVERHEAD COST ON THE SELLING PRICE OF A PRODUCT

CHAPTER ONE

INTRODUCTION

1.0  BACKGROUND OF THE STUDY

In view of the cost of manufacturing which involves the conclusion of raw material to finish goods through the utilization of labour and overhead support, therefore, the (3) three basic element of manufacturing cost are direct labour, direct material and production overhead.  The selling price of a product bring the separation of cost into both manufacturing costs, which are useful at the stage of introducing period cost and product cost.

Tuned Aderibigbe (1999) proves that in a merchandising company, the cost of good sold during a given period is obtain by adjusting purchase during the period with the difference between, the closing and opening stock of goods.  However, in the case of manufacturing company, the cost of good sold is obtained by adjusting the cost of good manufacturing during that period with the difference between the opening stock and the closing stock of finish goods.  But, inorder to determine the cost of goods manufactured during that period, we must first of all adjust the difference between the beginning and the ending work in progress.  So far, in an attempt to find the cost of a group of units of product, we don’t have much problem because we can trace the production overhead cost as the part of the cost that are necessary for the production of such product.  Beside, the production stage of a company like “UNLIEVER PLC” relies on the quality, branding experience of its products and service respectively for the sole determinant of its success or achievement of marketing goals.

Bell Martins (1999) of marketing concept and strategy, where he analyse pricing as a crucial aspect of the sale appeal.  Though, pricing is one of the importance of marketing mix.  It must determine the price of a products as it is obviously known that it is the price charged by a company on it product that will determine if the product will succeed or fail and which can make the company records losses or profit.  A company like “UNILEVER PLC”.  Relies on the ability of its sales function for achievement of its marketing objectives, where emphasis is heavily placed on sales management issues.  As far as I am concern on the steps toward the charging of overhead cost to the units, all overhead cost that are trace able to the various costs centers are first dealt with, that is, the process of charging to a cost center the overhead costs, arises solely because the cost must be incurred solely by the cost center.  The effect of overhead costs of “UNILEVER PLC” on selling price of a product could be obtained through the indirect material, clock cord payment for product workers who have spent their time on the maintenance of equipment, along side with invoices from suppliers and agencies for electricity bills, rents, rates and petrol among other items.

1.1  STATEMENT OF THE PROBLEM

In this present time of poor economy situation of the country, there has been a persistence race of poor variance on the cost of a product, which mostly was due to the lack of control.  The primary motive of a firm is to set a standard on its product inorder to achieve its goal and objectives.  Thus, the need for the satisfaction parameter to be enjoy by the society at large is that, any company that makes profit must be able to enjoy more people thereby satisfying an essential aspect of the societal need. Unfortunately, some organization concentrate more on manufacturing as only the conversion of raw material to finished goods through the utilization of labour and overhead without paying much attention to the cost of good sold during a given period.

As some organization face serious unfavourable returns, “UNILEVER PLC” is facing a serious profit squeeze.  Hence, this project will analyze the effect of overhead cost control on the selling price of product, that could considerably enhance a company.

1.2  OBJECTIVE OF THE STUDY

The aim and objective of this research work are:

1.     To know the activities involve in the physical charging of raw materials to finish goods.

2.     To identify  the process of charging to cost center of a fair share of common item of cost.

3.     To identify the actual overhead cost that can be trace directly to each cost center.

4.     To know that the differentiation of actual overhead and absorbed factory overhead is essential.

5.     To know that the marketing sales and subsequent services to the output of a business is an essential role to be played on the selling price of a product.

1.3   HISTORICAL BACKGROUND OF LEVER BROTHERS NIG. PLC

Lever Brother Nigeria Plc, a leading company in the industrial sector is involved in the manufacturing and marketing of detergent, soap, skin cream, tooth paste, squash drink, edible oils, and fats tea and coffee as well as range of petroleum jelly and other personal care product.  The company was established in 1923, when its was incorporated as a private company under the name Lever Brother (W.A) Limited, in 1924, the name was later changed to West African Soap Company Limited and later Lever Brother Nigeria Limited in 1955, when the company went public in 1979, it subsequently changed its name to Lever Brother Nigeria Limited.  In compliance with the company and Allied matter degree 1990, the company substituted the word “limited in the name of “PLC” to become Lever Brother Nigeria Plc.  Inorder to ensure sustained focus in management,  the company now has four manufacturing sites for its operation from the Original Six viz, Apapa the premier and largest  site, produces soaps such as Sunlights, Key; OxBar, Lux, Breeze, life and buy astral and some other personal products such as tooth paste and Vaseline range.  The second oldest site Aba is devoted to the product of non soapy detergents, powders and bar actions of non soapy detergent, powders and bars, Third newest of plants, commissioned in 1983, is the ultral modern food factory in Agbara, where the company produced Royco, Blue Band, Planta, Treetop, Oroyo and of course the fourth, the Oregun site where popular personal product Band like Elida Pears, Satin Sheen, Lotus etc are product.  It is intended to consolidate all the personal product production Toothpaste and Vaseline range at this site ultimately.  The aim of the company is to lead in out core market of fast consumer product and achieve strong profitable growth by the best at identifying and meeting consumers need through delivery of superior valued products.  The objective of the company is to bring in expatriates who are willing and able to work in Nigeria and who will contribute as well as to help train Nigeria Lever Brother Nigeria Plc.  Has been dedicated to the production of top quality product/brands for Nigeria for over Seventy years.

1.4   SIGNIFICANCE OF THE STUDY

It is a common knowledge that when there is boom, management of ten employs less of the overhead cost techniques.  They can afford to incure more cost, as the effect of such cost will not be felt on the over all profit.  However, in the period of depression management often try to employ all the method of overhead cost to minimmnize cost benefit analysis of a product.  This will further make the management to employ effect cost of product techniques so as to minimize the selling price of product.

1.5   RESEARCH QUESTIONS

1.          How can the process of charging to cost center of a fair share of common item of cost can be identify.

2.          How can we identify the actual overhead cost that can be trace directly to each cost center.

3.          How essential is the differentiation between the actual overhead and absorbed factory overhead.

4.          What is the role played on the selling price of a product by the marketing sates and subsequent services to the output of a business.

5.          What are the activity involved in the physical charging of raw material to finish goods.

1.6DEFINITION OF TERMS

 -      OVERHEAD:        There are cost which are not part of prime cost.  It is the addition of all indirect cost.

-       ADVERSE VARIANCE:  This occur when the actual cost is greater than the standard or budgeted cost

-       VALUE OF CHAIN: This is all activities that are needed to be carried out before a consumer received the final product.

-       PRODUCT STAGES:  This relies on the quality, branding, experience of its product and services for the sole determinant of its success.

-       SELLING STAGES: This relies on the ability of its sales function for the achievement of its marketing objective where emphasis is heavily placed on sales management issues.

-       BUDGET:             This is a statement of planned actions in monetary terms indicating revenue to be generated, expenditure to be incurred and capital items to achieve a given objective for particular time or period.

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