THE IMPACT OF FACTORY OVERHEAD COST ALLOCATION ON PRODUCTION COST AND PRICING DECISIONS: EVIDENCE FROM AN INDONESIAN CULINARY SME

Abstract

Accurate production cost information is essential for small and medium-sized enterprises (SMEs) to establish appropriate selling prices and maintain profitability. However, many culinary SMEs continue to rely on simple costing practices that emphasize direct materials and direct labor while giving insufficient attention to factory overhead costs. This study addresses this gap by examining how factory overhead cost allocation influences production cost determination and pricing decisions in an Indonesian culinary SME. The study aims to evaluate the production costing practices of Queen Risoles and assess their implications for selling price determination. A qualitative case study approach was employed, using primary data collected through direct observation, interviews, and documentation of production costs. The data were analyzed descriptively by identifying production cost components, calculating unit production costs, and evaluating the resulting selling price using a cost-plus pricing approach. The findings indicate that production cost determination should incorporate direct materials, direct labor, packaging, and factory overhead. Based on the company's reported calculation, the total production cost for 100 mayonnaise risoles was IDR 258,000, resulting in a reported unit production cost of IDR 2,580. Applying a 30% target profit margin resulted in a selling price of IDR 3,354 per unit. The findings suggest that systematic factory overhead allocation can improve cost accuracy and provide a more reliable basis for pricing decisions. Practically, the study highlights the importance of strengthening cost accounting practices among culinary SMEs to support profitability and sustainable pricing decisions.