Job Costing and Pricing: Empirical Evidence from a Printing Company

Rajiv D. Banker* Hsihui Chang* Chin S. Ou** Anne Wu***

The University of Texas at Dallas, Richardson, Texas, USA

**

National Chungcheng University, Chia-yi, Taiwan, ROC

***

National Chengchi University, Taipei, Taiwan, ROC

Last revised: December 19, 1999

The authors thank Shi Chen (President), Yun-Fu Chieng (Vice President, Operations), Andy Hong (Assistant Manager, Marketing), Che-Yu Shen (Manager, Marketing), and Suzan Chang (Assistant Controller) at Shens Art Printing Co. Ltd. for providing their time and access to cost and operations data that made this study possible

Job Costing and Pricing: Empirical Evidence from a Printing Company

ABSTRACT: Using job cost data from a leading printing company in Taiwan, this study empirically examines product pricing behavior both before and after a change in the job order costing system. As direct material costs are billed separately, and labor costs are fixed, only a negligible proportion of the job costs is variable at this company. A key finding is that allocated fixed job costs are significant in explaining variations in short run prices even after controlling for job volume and quality requirements. The results also indicate that pricing behavior changed following the change in the job costing system. After the change, prices depend more on the full costs calculated based on the new system than on the full costs based on the old system, although neither cost estimate was reported to marketing managers when bidding for jobs.

Key Words: Printing, Job order costing, Product costing, Pricing, Cost distortions Data Availability: The confidentiality agreement with the firm that provided data for this study precludes disseminating detailed data without its consent.

Job Costing and Pricing: Empirical Evidence from a Printing Company

1. Introduction Whether product cost information is used by managers in making product pricing decisions remains a controversial question. Some suggest that market demand and competitive forces influence prices much more than cost considerations. Economic analysis indicates that a product's price in the short run should be based on its marginal cost to maximize profits. Consistent with this prescription, most management accounting textbooks suggest that short run prices should be based on variable costs. Questionnaire survey studies, however, suggest that managers rely on full cost rather than variable cost information for pricing decisions. While this inconsistency between theoretical and survey studies questions the role of product costing systems in pricing decisions, there is very little hard evidence from firms on whether and to what extent their actual prices depend on variable or fixed costs. In this study, we collect job cost and price data from a printing company to assess the relationship between costs and prices. Specifically, we address the question whether pricing decisions depend on allocated fixed costs, and whether these decisions change following a change in the job costing system. Economists have extensively studied how prices are determined under various market conditions. Under perfect or imperfect competition, equilibrium price in the short run is a function of marginal cost, but independent of fixed cost. Equilibrium price is a function of average cost in the long run because all factors of production are assumed to be variable in the

long run (Pashigian 1998, p.269). Noreen and Soderstrom (1994), however, present empirical evidence indicating that hospital costs do not vary strictly proportionally in the long run. Reflecting the long run analysis that treats all costs as variable, Kotler (1994, p.498) states in his marketing textbook that "while market demand might set a ceiling, cost sets the floor for the price that the firm can charge for its product." The firm will seek "to charge a price that both covers all its costs for producing, distributing, and selling the product, and delivers a fair rate of return for its effort and risk" (Kotler and Armstrong 1999, p.305). For short run decisions, however, Atkinson, Banker, Kaplan and Young (1997, pp.316-319), Garrison and Noreen (1997, p.832), Hilton (1997, pp.754-760) and Horngren, Sundem and Stratton (1996, pp.186-188) all prescribe analyses based on variable costs for the determination of optimal prices. Questionnaire surveys by Govindarajan and Anthony (1983) and Shim and Sudit (1994) indicate that managers at a majority of firms rely on full cost information for pricing decisions. Govindarajan and Anthony (1983) found in their survey of Fortune 1000 companies that 82% of the respondents priced their products based on full costs. Only 17% of the respondents indicated that they rely on variable costs for their product pricing decisions. Shim and Sudit (1995) found that about 70% of the companies used full cost-based pricing, 12% used variable cost-based pricing, and 18% used market-based pricing. Consistent with this empirical evidence, Banker and Hughes (1994) provide an economic model of pricing decision that suggests that optimal price is a function of the full cost of a product if the assumptions of their model hold. Balachandran, Balakrishnan and Sivaramakrishnan (1997) also find that a product's full costs

provide a reasonable and practical way to simplify a firm's capacity planning problem, particularly when products do not share too many constrained resources. The apparent prevalence of full cost pricing in practice underscores the importance of appropriate cost allocation methods in the design of product costing systems. Cooper and Kaplan (1987, p.206) found that "in nearly all of the companies we visited, management was not convinced that their full cost systems were adequate for product-related decisions. Management did not believe that their systems accurately reflected the costs of resources consumed to manufacture products." Consequently, many firms have changed their product costing systems in the last decade. An interesting question arises in this context: If managers rely on product cost information in pricing decisions, then does a change in the costing system result in a change in the pricing behavior? Specifically, do prices continue to be related to old cost information, or do prices adapt to the new costing system? With the accelerating globalization of business, management accounting researchers have increasingly conducted research in international contexts (Chow, Kato and Shields 1994). To investigate the relationship between costs and prices, we collected job cost, price and operations data from a leading printing company in Taiwan that had recently changed its product costing system. This setting is suitable for our research for several reasons. First, the company's senior executives were willing to provide its price, cost, and operations data to us. Second, because of the customized nature of printing orders, managers must set prices in the short run individually for each order. Therefore, we have many individual observations on job costs and prices for our empirical analysis. Third, the printing industry is highly competitive, and market forces are likely to influence pricing decisions. Therefore, the role of costs in pricing decisions remains

questionable ex ante. Fourth, our research site's job cost structure is dominated by fixed costs because direct material costs are billed separately to the customer and excluded from job costs, and contractual restrictions with the labor union render all labor costs fixed. Therefore, allocated fixed costs play a prominent role in our analysis. Finally, the recent change in the job costing system allows us to examine pricing decisions both before and after the change. The remainder of the paper is structured as follows. We describe our research site in section 2, and its old and new costing systems in section 3. In section 4, we describe the sample data and variable definitions. We discuss our empirical results in section 5. Finally, we conclude in section 6 with a summary of our results.

2. The Research Site Taiwanese printing industry's production value in 1996 was estimated at $2.8 billion,1 growing at an estimated rate of 7% annually in the 1990s (Printing Industry Survey Report, Taiwan, 1987-1996). There are about 7,800 companies in the printing industry in Taiwan, but only 1,000 have registered factories and only the three largest companies, Chiu-yu, Flower Queen, and Shens, are publicly held companies (Annual Survey of Printing Industry in Taiwan, 1988-1996). Most companies are family-owned businesses. They are small in size, typically managed by the owners. Competition between all these firms is very keen, based on competitors' price, quality, and customer service. Our research site, Shen's Art Printing Co., Ltd. (hereafter Shen's), is one of the leading printing firms in Taiwan. In 1996, it had an equity capital of $12 million, annual sales of $24

million, 157 employees and a market share of nearly 1% in a fragmented industry. Shen's has a strong reputation for high quality printing. Since 1987, it has used a modern factory with automatic control of temperature, humidity, and air pollution. It was one of the first firms in Taiwan to obtain both ISO 9002 and ISO 14000 certifications. Shens specializes in printing high quality photographic and other artistic images. Its printing products can be broadly classified into three types. The first type is "books", such as fine art books and cookbooks. The second type is "magazines", principally monthly and quarterly periodicals. The third type is labeled "others", primarily printing products for commercial publicity and promotion, such as posters, brochures and calendars. All printing jobs at Shen's are based on sales orders in accordance with customer requirements. Production plans are the responsibility of a coordination committee consisting of representatives of the marketing department, the production department and the production control department. Based on these plans, daily production schedules for different jobs are prepared by the production control manager. We interviewed several of Shens senior executives, including the two managers responsible for its marketing and sales activities. They indicated that the marketing department considers overall market condition, competition, and historical costs to prepare a standard price reference table. The table is reviewed and authorized by Shens president. The actual prices approved by a sales manager for a job, however, usually vary from the standard list price, reflecting current market conditions and special considerations about the customer and job requirements. Our review of internal company documents revealed that Shen's takes into
1

All amounts in New Taiwan Dollars (NT$) have been transformed and presented here as equivalent U.S. Dollars

consideration several factors in determining job prices. Prices depend on product type: whether the job is for books, magazines, or others. Since market demand fluctuates periodically in the printing industry, prices reflect shifts in demand and competitors current prices and expected reactions. Prices also reflect the quality level required by the customer. Quality level is measured in terms of machine speed, high quality requires low machine speed. Job costs are not estimated before bidding for a job. However, actual job costs are accumulated and measured by the cost accounting system. Shen's controller reviews the job costs and informs senior executives of key trends each month. Also, the marketing department has access to historical cost data when setting standard list prices. Therefore, while estimated job costs are not directly considered for the pricing decisions, we cannot preclude the possibility that cost information influences these decisions overall.

3. Job Costing System Shen's cost accounting system is a historical cost system that retrospectively assigns actual costs to jobs based on realized rather than predetermined cost and operating data. It accumulates printing operation costs in the eight cost pools listed below: (1) Direct labor (salary, overtime and bonus for press operators and assistants). (2) Indirect labor (salary and bonus for printing management staff). (3) Utilities (electricity and power). (4) Supplies (printing inks and supplies). (5) Equipment-related (plant and machinery depreciation, insurance, repairs and maintenance).

($) using the prevalent currency exchange rate of about $ 1 = NT$ 26.

(6) Quality assurance and production control. (7) Miscellaneous (books, newspaper, copier, transportation, mail, telephone, travelling). (8) Others (fees, taxes, inspection, training). Since Shen's bills customers separately for all actual direct material (paper) and printing plate preparation costs, its job costing system focuses only on conversion costs. Except for supplies and utility costs, all other conversion costs are considered to be fixed costs. Variable costs account for less than 5% of the total printing operation costs at Shen's. Shen's employs a two-stage cost allocation system that first allocates the costs accumulated in the eight cost pools to individual operation centers. Each printing machine is considered to be an operation center for this purpose. A separate overhead rate is then determined for each operation center to allocate costs to jobs in the second stage. Specifically, in the first stage, costs in each of the eight cost pools are assigned to each operation center based on relevant allocation bases listed below: First stage cost pools (1) Direct labor costs (2) Indirect labor costs (3) Utilities (4) Supplies (5) Equipment-related costs - Machine depreciation, insurance, repairs and maintenance - Plant depreciation, insurance, Directly identified Allocation bases Directly identified Direct labor hours Machine hours Color-reams

repairs and maintenance (6) Quality assurance and production control (7) Miscellaneous costs (8) Other costs - Fees and taxes - Employee training - All other

Working area used Machine hours Machine hours

Working area used Number of employees trained Machine hours

Thus, all costs accumulated in the first stage are allocated to the different operation centers. The first stage allocation method was not changed during our sample period. However, in the middle of the sample period, significant changes were made in the second stage allocation method. In the second stage of the old costing system, Shens assigned the costs accumulated in each operation center to job orders on the basis of the number of color-reams for that operation center. Color-ream is commonly used in the printing industry as a measure of volume. A ream has 500 sheets of paper. The following information is used by the production control department to compute the number of color-reams for each job: How many pages are printed for the job? Is printing required on one side or both sides? How many colors are required? How many pages can be printed on a sheet? The number of color-reams for each job is then computed as (colors * sides * pages)/(500 * pages per sheet). The overhead rate per color-ream for each operation center is calculated by dividing its accumulated monthly costs by its total number of color-reams for that month. The advantage of using color-reams as a single allocation base is its simplicity. However, the management at Shen's felt that its old costing system was not able to provide

reliable information for managerial decisions such as production efficiency evaluation and product pricing. In order to improve the accuracy of job costs, Shen's revised its second stage allocation procedure. Instead of using the number of color-reams as the sole cost driver, Shen's established five activity cost pools for each operation center that correspond to the five basic activities in the printing process. These activities are: preparation, imposition, press machine, supplies handling, and machine waiting. Costs accumulated for each operation center are now traced further to the five activities for each center. Costs assigned to an operation center in the first stage based on direct labor or machine hours are apportioned between different activities using the same basis. Supplies costs are traced to supplies handling activity. Equipment-related and other costs assigned in the first stage based on working area are apportioned based on machine hours and employee's training costs are apportioned based on direct labor hours. A separate cost driver rate is calculated for each of the five activities in each machine operation center. The preparation activity consists of getting the plate ready for imposition onto the machine, such as machine cleaning and machine adjustment for plate size. Since preparation activity costs increase with the number of plates used, Shen's new costing system uses the number of plates as the cost driver for this activity. The imposition activity is also referred to as plate fixing. It involves the placement of a plate onto a printing machine so that the printing activity can be performed. Different jobs consume different amounts of time for imposition due to differences in plate size and quality requirement. Therefore, the number of imposition work hours is the cost driver for the imposition activity. Press machine represents the core printing activity. Its cost driver is the actual machine hours used in printing a job. Supplies handling

includes primarily the changing of inks and other supplies. The number of color-reams is used as the cost driver for supplies handling costs because the consumption level of inks depends on the number of color-reams. Machine waiting is the waiting time associated with individual operation centers due to machine breakdown, and required repairs caused by the size and complexity of a printing job. The number of waiting hours is the cost driver for this activity. Depending on the operation centers visited by a printing job, the appropriate activity cost driver rates are used to assign activity costs to an individual job based on its consumption of those activity cost drivers. Thus, the new costing system recognizes the operation centers used by the job and the activities performed in each operation center during the printing process for the job. Since the old costing system relied on a volume measure (the number of color-reams) as the sole second stage allocation basis for each operation center, it was likely to overcost large volume jobs because several printing operation costs are caused by non-unit related drivers (Cooper and Kaplan, 1987). In contrast, jobs requiring a higher level of quality were likely to be undercosted under the old costing system because a higher quality level requires lower machine speed which, in turn, implies more machine hours and higher costs with the same number of color-reams. These suggest the following two hypotheses: H1.1: Ceteris paribus, large volume jobs are overcosted under the old costing system. H1.2: Ceteris paribus, jobs requiring higher levels of quality are undercosted under the old costing system. Since most of the job costs are allocated fixed costs, classical economic analysis suggests that job prices will be independent of such costs. However, questionnaire survey evidence of

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Govindarajan and Anthony (1983) and Shim and Sudit (1995), and recent economic analysis of Banker and Hughes (1994) suggests the following two hypotheses: H2.1: Job costs generated from the old costing system are positively associated with job prices before the change in the costing system. H2.2: Job costs generated from the new costing system are positively associated with job prices after the change in the costing system. If Shens managers rely on full costs when setting prices, then the pattern of job prices should change after Shens changed its costing system. The old costs should be the basis for job pricing before, and the new costs should be the basis after, the adoption of the new costing system. Therefore, we test the following hypothesis: H2.3: After the change in the costing system, job prices depend more on job costs estimated from the new costing system than on job costs generated from the old costing system.

4. Sample Data and Variable Definitions We hand-collected the data used in this study from Shen's job cost accounting and operating records. We refer to the year Shens changed its job costing system as Year . There was no change in the printing capacity or plant machinery configuration during our sample period. However, since detailed capacity utilization data were not maintained, we collected data for sample of 300 jobs each from the same period in the second quarter of the preceding and the subsequent years, Year -1 and Year +1 to control for possible differences in demand across different seasons. After deleting 34 jobs for which complete operating data were not available,

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our final sample included data for the number of observations (jobs) described below by product types and sample years.

Product Type Books Magazines Others Total

Year -1 143 88 56 287

Year +1 141 75 63 279

We constructed the following variables for our empirical analysis: OLDCOST: Cost of a job based on the old costing system, available for both Year -1 and Year +1 samples. NEWCOST: cost of a job based on the new costing system, available only for the Year +1 sample. OLDCOST/NEWCOST: Ratio of the cost of a job based on the old costing system to the cost of the same job based on the new costing system. PRICE: Actual price of a job, excluding direct charges for materials and plate preparation. COLOR-REAM: Total number of color-reams for a job. QUALITY: Level of quality required by a job, measured on a 10-point scale representing machine speed. A value of 1 represents the highest machine speed and the lowest level of quality requirement, a value of 10 represents the lowest machine speed and the highest level of quality requirement.

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Price and cost data presented here have been disguised by a scaling factor.2 Descriptive statistics of all variables are reported in Table 1. The median values of costs, prices, and colorreams are much smaller than the mean values in both Year -1 and Year +1 samples, indicating that the data are skewed to the left. When the data are logarithmically transformed for empirical estimation, this skewness is alleviated. The total of old costs over all jobs equals the total of new costs over all jobs for Year +1, and these totals of old and new job costs are almost equal for our sample. We observe, however, that the means of the ratio of the old cost to the new cost are less than one for each product type for our sample. It may appear at first glance that all product types were undercosted on average for our sample. In fact, this is a general result that occurs due to skewed data (Sunder 1983): There is a small number of large jobs that were overcosted by the old system, balanced by a large number of small jobs that were undercosted. Specifically, the average number of colorreams is 3,165, 16,022 and 2,542 for the 11, 32 and 16 jobs in our sample for which the old cost is greater than the new cost for the product types "books, "magazines" and "others", respectively. In contrast, the average number of color-reams is 389, 2,484 and 77 for the 130, 43 and 47 jobs for which the old cost is less than the new cost for the product types "books", "magazines" and "others", respectively. Averages for old costs and prices per job are lower in Year +1 compared to Year -1 for "books" and "others", but they are higher for "magazines". Comparing prices with old costs for the two years suggests that "magazines" appear to be more profitable than the other two product types. The profit margin per job for "magazines" is 37% [$2,233-$1,390)/$2,233] and

Data transformation impacts only the estimate of the intercept term in our OLS regression.

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41% [($4,891-$2,885)/$4,891], respectively for Year -1 and Year +1, compared to profit margins of 26% [($1,220-$968)/$1,220] and 20% [($1,079-$792)/$1,079] for "books", and 25% [($1,071-$841)/$1,071] and 21% [($775-$579)/$775] for "others" for the two samples. In contrast, comparing prices with new costs for Year +1, we find that while "magazines" are more profitable than the other two products, "books" are considerably less profitable. The profit margin per job for "magazines" is 47.7%[$4,891-$2,556)/$4,891], but only 9.8%[($1,079$973)/$1,079] for "books" and 26.8%[$775-$567)/$775] for "others". Descriptive statistics for the quality level reveal an increase in the quality requirement for all three product types between the Year -1 and Year +1 samples. The average volume measure, number of color-reams per job, increased substantially for magazines and others", but decreased for books between the two samples.

5. Estimation Models and Results To evaluate the two cost distortion hypotheses, we specify the following estimation model:
ln(OLDCOST/NEWCOST) = 0 + 1lnCOLOR-REAM + 2lnQUALITY + (1)

Since old and new cost data are both available only after the change in the costing system, we estimate Model (1) separately for each of the three product types, using only the Year +1 sample data. We present the regression results in Table 2. Belsley, Kuh and Welsch's (1980) eigenvector-based diagnostics indicated that collinearity is not a problem for this model. Panel A of Table 2 indicates that the coefficient estimates for color-reams are significantly positive for

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all three product types, supporting Hypothesis 1.1 that large volume jobs are overcosted. The coefficient estimates for the quality requirement level are significantly negative for all three product types, supporting Hypothesis 1.2 that jobs with higher level of quality requirement are undercosted under the old costing system. Together, these two sets of results indicate that the old costing system is significantly different from the new costing system. Since the job costs estimated by the prevailing costing system change significantly between the Year -1 and Year +1 samples, it is of interest to examine next if the pricing patterns changed systematically in response to the costing change. To test the three hypotheses about the relation between costs and prices, we specify the following three estimation models:
lnPRICE = 0 + 1lnOLDCOST + lnPRICE = 0 + 1lnNEWCOST + lnPRICE = 0 + 1lnOLDCOST + 2lnNEWCOST + (2) (3) (4)

Since NEWCOST data are available only for the Year +1 sample, we estimate Model (2) with both Year -1 and Year +1 data, but Models (3) and (4) only with the Year +1 data. We present regression results relating prices to the old costs in Table 3. The coefficients for OLDCOST are significantly positive for all three product types in Year -1 (in Panel A) supporting Hypothesis 2.1 that prices depend on costs. These coefficients are significant also in Year +1 (in Panel B). Coefficient for each product type in Year -1 (ranging between 0.83 and 0.97) is also higher than the corresponding coefficient in Year +1 (ranging between 0.61 and 0.69). Adjusted R2 (ranging between 0.78 and 0.84) measuring the explanatory power of the regressions in Year -1 are also higher than the corresponding values (between 0.69 and 0.80) in

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Year +1. Thus, it appears that the relation between price and old cost is not as strong in Year +1 as in Year -1. Regression results relating prices to the new costs are reported in Table 4. The results indicate that the coefficient for NEWCOST is significantly positive for all three product types, supporting Hypothesis 2.2 that prices after the cost system change depend on the new costs. The coefficients range between 0.90 and 0.99, indicating that a 1 percent change in cost results in a nearly 1 percent change in the price. The adjusted R2 for each product type in Year +1 (ranging between 0.76 and 0.83) is higher than the corresponding values for the OLDCOST regressions for Year +1 reported in Panel B of Table 3, indicating that NEWCOST explains a little more of the variation in Year +1 prices than does OLDCOST. In Table 5, we also report regression results relating prices to both old and new costs. Belsley, Kuh and Welsch's (1980) diagnostics indicate collinearity between OLDCOST and NEWCOST, which is likely to inflate the standard errors. However, the coefficient of NEWCOST for each product type is significantly greater than the corresponding coefficient of OLDCOST for all three product types, supporting Hypothesis 2.3 that new costs influence prices after the cost system change more than the old costs. Collectively, the results reported in Tables 3, 4, and 5 suggest that prices depend to a large extent on the old costs in Year -1 and on the new costs in Year +1. As described earlier, our field interviews suggested that the pricing decision is influenced also by factors such as job volume and quality requirements. Nonfinancial measures have increasingly been the focus of management accounting research (Ittner, Larcker and Rajan 1997, Banker, Potter and Srinivasan 2000). Therefore, to control for the potential confounding effects

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of these nonfinancial variables, we also added the number of color-reams (COLOR-REAM) and quality requirement (QUALITY) as control variables to our earlier estimation models:
lnPRICE = 0 + 1lnOLDCOST + 2lnCOLOR-REAM + 3lnQUALITY + lnPRICE = 0 + 1lnNEWCOST + 2lnCOLOR-REAM + 3lnQUALITY + lnPRICE = 0 + 1lnOLDCOST + 2lnNEWCOST + 3lnCOLOR-REAM + 4lnQUALITY+ (5) (6) (7)

Belsley, Kuh and Welsch's (1980) diagnostics indicate collinearity between OLDCOST and COLOR-REAM in Model (5), and between OLDCOST and NEWCOST in Model (7), which may bias results against the rejection of the null hypotheses. Regression results relating prices to old costs and control variables in Model (5) are presented in Table 6. We observe from Panel A of Table 6 that OLDCOST continues to exhibit significant explanatory power in Year -1 even after controlling for color-reams and quality requirements. As before, the sensitivity of prices to old costs is reduced in Year +1, especially in relation to the control variables which assume relatively greater significance in the Year +1 regressions. We report Model (6) regression results relating prices to new costs and control variables in Table 7. Again, consistent with the results reported earlier, we find that the new costs significantly explain variations in prices in Year +1 even after controlling for job volume and quality requirements. In Table 8 we report regression results relating price to the old cost, new costs and control variables for the Year +1 samples specified in Model (7). The coefficient estimate of the new cost for each product type (ranging from 0.19 to 0.56) is higher than the corresponding coefficient of the old cost (ranging from 0.06 to 0.30), suggesting that the new cost has a greater

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influence on prices in Year +1 than the old cost, even after controlling for the potential effect of job volume and quality requirements. We conducted several econometric tests of our model specification. White's (1980) test did not indicate heteroskedasticity for any of the models for either Year -1 or Year +1 sample. We employed the criteria proposed by Belsley, Kuh and Welsch (1980) to identify influential observations. Results remain substantially unchanged when the models are reestimated after removing the identified outliers. We also employed the procedure proposed by Davidson and MacKinnon (1985) to test whether a linear or a log-linear model is the appropriate specification. The results indicate that a log-linear model is the appropriate specification for all our models except in the case of Model (1) for "magazines". However, results estimated from a linear specification of Model (1) for "magazines" are qualitatively similar to the results reported in Table 2 for a log-linear model. To further evaluate the robustness of our results to different functional specifications, we re-estimated all models as rank regressions, maintaining the assumption of only a monotone relationship between the dependent variable and each of the independent variables in our models (Iman and Conover, 1979). The results (not reported here) support the insights obtained from the log-linear models described earlier.

6. Concluding Remarks In this study, we analyzed cost, price and operations data for 566 jobs from a leading printing company in Taiwan to evaluate the role of job costs in pricing decisions. We also examined how pricing decisions were affected by a change in the job costing system in the middle of our two sample periods.

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Our empirical results suggest that prices of printing jobs depend on their full costs. The costs generated from the old costing system explain much of the variation in prices in the year preceding the system change and the costs generated from the new costing system explain much of the variation in prices in the year following the system change. These results are robust to the inclusion of additional control variables such as job volume and quality requirements. The case for improvements in the design of product costing systems is often motivated by appealing to the potential impact of costs on pricing decisions. However, there has been scant, if any, empirical evidence on whether, and to what extent, costs influence prices, and whether full as opposed to variable costs are associated with prices. By documenting the role of full costs in pricing decisions and the impact of a change in the job costing system on job prices in one organization, we have sought to stimulate empirical research on this important research question in management accounting.

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Table 1: Descriptive Statistics on Job Costs, Prices and Contextual Variables Panel A: Year -1 Variables OLDCOST

Sample (N) Mean Std Dev. 25% 50% Books (N=143) $968 $1,023 $390 $612 Magazines (N=88) $1,390 $1,389 $484 $970 Others (N=56) $841 $1,198 $129 $239 PRICE Books (N=143) $1,220 $1,463 $376 $646 Magazines (N=88) $2,233 $2,085 $966 $1,540 Others (N=56) $1,071 $1,443 $163 $502 QUALITY Books (N=143) 3.727 1.816 3 4 Magazines (N=88) 4.318 2.521 2.5 4 Others (N=56) 6.268 3.435 3.5 7 COLOR-REAM Books (N=143) 643 828 211 363 Magazines (N=88) 1,750 2,748 292 833 Others (N=56) 370 1,187 4 38 N = Number of job orders. OLDCOST = Job cost generated from the old costing system. PRICE = Actual price of a job. QUALITY = Quality level with values ranging from 1 being the lowest level of quality to 10 being the highest level of quality. COLOR-REAM = Number of color-reams. Panel B: Year +1 Variables OLDCOST

75% $1,049 $1,662 $831 $1,460 $2,748 $1,097 5 5.5 10 744 1,603 181

NEWCOST

OLDCOST/NEWCOST

PRICE

QUALITY

COLOR-REAM

N OLDCOST NEWCOST OLDCOST/NEWCOST PRICE QUALITY COLOR-REAM

Sample (N) Mean Std Dev. 25% Books (N=141) $792 $2,386 $99 Magazines (N=75) $2,885 $7,158 $435 Others (N=63) $579 $1,373 $43 Books (N=141) $973 $1,639 $223 Magazines (N=75) $2,556 $4,986 $641 Others (N=63) $567 $948 $111 Books (N=141) 0.5725 0.3755 0.3463 Magazines (N=75) 0.8765 0.4508 0.5376 Others (N=63) 0.6696 0.5009 0.2402 Books (N=141) $1,079 $1,871 $223 Magazines (N=75) $4,891 $9,358 $1,042 Others (N=63) $775 $1,174 $120 Books (N=141) 6.581 1.825 5 Magazines (N=75) 5.733 2.029 4 Others (N=63) 8.174 1.792 7 Books (N=141) 605 1,484 74 Magazines (N=75) 8,260 26,683 348 Others (N=63) 703 3,909 5 = Number of job orders. = Job cost generated from the old costing system. = Job cost generated from the new costing system. = Ratio of OLDCOST to NEWCOST of a job. = Actual price of a job. = Quality level with values ranging from 1 being the lowest level of quality to 10 being the highest level of quality. = Number of color-reams.

50% $335 $681 $130 $632 $871 $258 0.5149 0.8626 0.4778 $546 $1,900 $406 6 5 9 274 1,025 22

75% $589 $2,983 $480 $954 $2,624 $601 0.7576 1.3133 1.0635 $1,171 $4,186 $941 8 7 10 545 3,465 86

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Table 2: Regression Results Relating Cost Distortions to Contextual Variables (t-values in parentheses) ln(OLDCOST/NEWCOST) = 0 + 1lnCOLOR-REAM + 2lnQUALITY +
Variables lnCOLOR-REAM lnQUALITY Adjusted R2 F-statistics Coefficients 1 2 Predicted signs + Books (N=141) 0.0769 (2.667)*** -0.4034 (1.933)** 0.120 10.534 Magazines (N=75) 0.0798 (1.871)** -1.1248 (3.857)*** 0.404 26.142 Others (N=63) 0.1158 (3.112)*** -1.9186 (5.501)*** 0.541 37.631

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, *** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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Table 3: Regression Results Relating Job Prices to Old Costs (t-values in parentheses) lnPRICE = 0 + 1 lnOLDCOST + Panel A: Year -1
Variable lnOLDCOST Adjusted R2 F-statistics Coefficient 1 Predicted sign + Books (N=143) 0.9687 (22.554)*** 0.781 508.667 Magazines (N=88) 0.8332 (19.360)*** 0.811 374.820 Others (N=56) 0.8292 (17.266)*** 0.843 298.124

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1. Panel B: Year +1
Variable lnOLDCOST Adjusted R2 F-statistics Coefficient 1 Predicted sign + Books (N=141) 0.6862 (21.200)*** 0.762 449.444 Magazines (N=75) 0.6390 (13.019)*** 0.694 169.4934 Others (N=65) 0.6067 (15.828)*** 0.801 250.516

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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Table 4: Regression Results Relating Job Prices to New Costs (t-values in parentheses) lnPRICE = 0 + 1lnNEWCOST +
Variable lnNEWCOST Adjusted R2 F-statistics Coefficient 1 Predicted sign + Books (N=141) 0.9049 (23.049)*** 0.791 531.256 Magazines (N=75) 0.9858 (15.356)*** 0.760 235.791 Others (N=63) 0.9478 (17.448)*** 0.830 304.426

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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Table 5: Regression Results Relating Job Prices to Both Old and New Costs (t-values in parentheses) lnPRICE = 0 + 1lnOLDCOST + 2lnNEWCOST +
Variables lnOLDCOST lnNEWCOST Adjusted R2 F-statistics Coefficients 1 2 Predicted signs + + Books (N=141) 0.2953 (4.389)*** 0.5586 (6.413)*** 0.815 310.164 Magazines (N=75) 0.1879 (1.853)** 0.7342 (4.905)*** 0.768 123.543 Others (N=63) 0.2603 (3.281)*** 0.5841 (4.797)*** 0.853 181.963

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test Variable definitions appear in Table 1.

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Table 6: Regression Results Relating Job Prices to Old Costs and Control Variables (t-values in parentheses) lnPRICE = 0 + 1lnOLDCOST + 2lnCOLOR-REAM + 3lnQUALITY + Panel A: Year -1
Variables lnOLDCOST lnCOLOR-REAM lnQUALITY Adjusted R2 F-statistics Coefficients 1 2 3 Predicted signs + + + Books (N=143) 0.9001 (13.923)*** 0.0566 (1.160) 0.1368 (2.372)*** 0.788 176.967 Magazines (N=88) 0.5281 (6.431)*** 0.2194 (4.170)*** -0.0240 (0.375) 0.842 155.826 Others (N=56) 0.3548 (4.658)*** 0.3234 (6.835)*** 0.0324 (0.504) 0.917 202.670

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1. Panel B: Year +1
Variables lnOLDCOST lnCOLOR-REAM lnQUALITY Adjusted R2 F-statistics Coefficients 1 2 3 Predicted signs + + + Books (N=141) 0.5440 (11.134)*** 0.1620 (4.377)*** 0.4872 (2.706)*** 0.790 177.058 Magazines (N=75) 0.1442 (2.058)*** 0.4742 (9.853)*** 0.4848 (2.086)*** 0.867 162.580 Others (N=63) 0.4390 (6.693)*** 0.1783 (3.746)*** 0.2921 (0.949) 0.835 105.695

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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Table 7: Regression Results Relating Job Prices to New Costs and Control Variables (t-values in parentheses) lnPRICE = 0 + 1lnNEWCOST + 2lnCOLOR-REAM + 3lnQUALITY +
Variables lnNEWCOST lnCOLOR-REAM lnQUALITY Adjusted R2 F-statistics Coefficients 1 2 3 Predicted signs + + + Books (N=141) 0.7919 (11.339)*** 0.0839 (2.005)*** 0.1569 (0.866) 0.794 181.002 Magazines (N=75) 0.2521 (2.407)*** 0.4373 (7.819)*** 0.3247 (1.498)* 0.870 166.433 Others (N=63) 0.7251 (8.186)*** 0.1044 (2.188)** -0.6446 (2.436)*** 0.864 132.521

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, ** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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Table 8: Regression Results Relating Job Prices to Old Costs, New Costs and Control Variables (t-values in parentheses) lnPRICE = 0 + 1lnOLDCOST + 2lnNEWCOST + 3lnCOLOR-REAM + 4lnQUALITY +
Variables lnOLDCOST lnNEWCOST lnCOLOR-REAM lnQUALITY Adjusted R2 F-statistics Coefficients 1 2 3 4 Predicted signs + + + + Books (N=141) 0.3023 (4.409)*** 0.4657 (4.711)*** 0.0722 (1.835)** 0.2896 (1.677)** 0.818 158.885 Magazines (N=75) 0.0645 (0.734) 0.1903 (1.414)* 0.4309 (7.589)*** 0.3973 (1.663)* 0.869 124.150 Others (N=63) 0.1351 (1.366)* 0.5638 (3.831)*** 0.1002 (2.109)** -0.3767 (1.149) 0.866 101.317

* Significant at 10% level using one-tailed t-test, ** Significant at 5% level using one-tailed ttest, *** Significant at 1% level using one-tailed t-test. Variable definitions appear in Table 1.

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