ASSESMENT OF COST ACCOUNTING SYSTEM IN CASE OF

MESSFIN G/SLASSIE & EZWTI BELAY METAL

MANUFACTURING
PARTNERSHIP

A SENIOR ESSEY SUBMITTED TO DEPARTMENT OF

ACCOUNTING & FINANCE OF AKSUM UNIVERSITY
IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR
BACHELOR OF ART (BA) DEGREE IN
ACCOUNTING & FINANCE

BY ; MEBRHIT ASMELASH
ADVISOR: GOITOM W/RIAM (MA)

Feb.2011 E.C
AKSUM,Tigray, Ethiopia
 Declaration
I undersigned deader that this student Research paper is my original work and had not been
presented for a degree in any other university and all the materials used for this study have
been duly acknowledged.
_________________ ______________
Name of student Signature
This student research paper has been submitted for examination with my approval as
university advisor.
__________________ ______________ __________
Name of advisor Signature Date

I
 Acknowledgement
First and for most great thanks are given to GOD. He has helped me in every aspect of my
life.
secondly, I greatly thanks to my advisor Goitom W/riam for his honest guidance Through
reading of the paper, valuable comments, suggestion and his kind full appreciation.
Thirdly, I would like to thanks Aksum University, especially college of business and
economics for designing this program.
Lastly I also greatly like to express gratitude respect to all employes, officers, & internal
auditors of MGEBMMP granting me opportunity to use their factory as case study, I would
like to thanks for all my friends & beloved parents , especially kidane brhane who was our
rip, since he supports me to prepare this research.

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 Table of contents
Declaration------------------------------------------------------------------------------------i
Acknowledgement---------------------------------------------------------------------------ii
Table of content------------------------------------------------------------------------------iii
List of tables-----------------------------------------------------------------------------------v
Abstract----------------------------------------------------------------------------------------vi
Acronym---------------------------------------------------------------------------------------vii
Chapter one ; Introduction-------------------------------------------------------------------1
1.1 Back ground of the study-------------------------------------------------------------1
1.2 Back ground of the organization-----------------------------------------------------3
1.3 Statement of the problem--------------------------------------------------------------3
1.4 Objectives of the study-----------------------------------------------------------------4
1.5 The specific objectives of the study--------------------------------------------------4
1.6 Significance of the study---------------------------------------------------------------4
1.7 Scope of the study-----------------------------------------------------------------------5
1.7.1 Limitation of the study----------------------------------------------------------------5
1.8. Research methodology------------------------------------------------------------------5
1.8.1 Research area---------------------------------------------------------------------------5
1.9 Source of data------------------------------------------------------------------------------5
1.9.1 Method of data collection -------------------------------------------------------------6
1.9.2 Sample and sampling techniques-----------------------------------------------------6
1.9.3 Method of data analysis----------------------------------------------------------------6
1.9.4 Organization of paper------------------------------------------------------------------7
Chapter two ; Literature review----------------------------------------------------------------8
2.1 What is cost accounting------------------------------------------------------------------9
2.2 Classification of costs-------------------------------------------------------------------12
2.3 Cost recording and accumulation procedurs-----------------------------------------12
2.4 Scrap, Spoilage and devectives--------------------------------------------------------14
2.5 Use of cost information ----------------------------------------------------------------15
2.5.1 Cost for planning and control--------------------------------------------------------15
Costing system-----------------------------------------------------------------------------------16
Job order costing system---------------------------------------------------------------------16
Process costing system-----------------------------------------------------------------------16

III
Chapter three ; Data presentation, analysis and interpretation-----------------------------18
3.1 Personal information---------------------------------------------------------------------19
3.2 Analysis of accounting for the majour elements of manufacturing costs---------24
3.3 Variance analysis-------------------------------------------------------------------------25
3.4 Cost controlig mechanism--------------------------------------------------------------26
Chapter four ; introduction----------------------------------------------------------------------28
4.1 Summery of findings conclusion and recommendation-----------------------------28
4.2 Summery of findings and conclusion--------------------------------------------------28
4.3 General Recommendation---------------------------------------------------------------30
References
Appendixes

IV
 List of tables

Table 1 the flow of costs in the factory.............................................................................21

Table 2: Scrap sales of the factory-----------------------------------------------------------------23
Table 3 Annually defective and modified production report of 2011-------------------------26
Table 4 The budget and actual costs of the two years of the factory--------------------------26

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 Abstract
The study “Assessment of cost accounting system” was conducted on Messfin G/slassie &
ezwti belay metal manufacturing partnership. The main objective of the study is to assess
whether the organization under consideration is using cost accounting systems in its
movement in accordance with the standards and theories of cost accounting and to
investigate an over view of cost accounting practices. To achieve this objective, both primary
and secondary data sources were used. Primary data were obtained using in depth interview
where as secondary data were obtained from manuals, records and other documents related
to cost were used.
The result of the data analysis showed that the factory used the standard cost is not up to
date to the current situation and the treatment of scrap is not identify scrap with individual
jobs. So, the factory should be revised the standard costing and it should adjust the treatment
of scrap with individual jobs.

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 ACRONYM

MGEBMMP =Mesfin Gebresilassie and Ezwti Belay Metal Manufacturing Partnership

VII
 Chapter one:

Introduction

1. Back ground of the study

Nowadays organizations give due attention for cost accounting, so as the technological
innovation changes the manufacturing industry in dynamic way.
Cost accounting is the process of accumulating the costs of a manufacturing process and
identifying them with the units produced. It is a unique subfield of management
accounting that interfaces with both managerial and financial accounting and it is also a
specialized area of accounting that attempts to satisfy the information need of
management. Management at all levels within an organization has the responsibility of
planning, coordinating, executing and controlling business operations. A large part of
information required to do these job efficiently is accounting oriented and it is the job of
the cost accountant to accumulate prepare and interpret this information. Hrngre, 2003, p
2-3).
In planning cost accounting deals with the future. It assists to budget or predetermine
material costs, labor and manufacturing, selling and distribution over head. These costs
may be used for determining process and measuring performances.
In addition they help managements in decision making with respect to capital expenditure
or expansion of facilities. The control aspect which deals with the present is achieved by
comparing actual results with the budget or predetermined standard and investigating the
courses of differences.
The organization emphasis has been made on different cost finding methods for estimate
the cost that has been incurred in a factory to manufacture specific products. One of the
method is job order costing are readily identified by individuals units a batches which
deal with broad average and masses of different units. This methods is application of
costs to specific jobs. Which may be either a single physical unit or a few similar unites.
This method is construction, furniture manufacturing, metal tools factories, etc.
The second method is process costing is a system by firms manufacturing standard
products for stock in a continuous floor, without reference to specific orders or lots. This

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method is mainly used whenever the output of individuals processes is reasonably
uniform or homogenous, as in flow milling, cement manufacturing and etc.
Generally the cost accounting system when applied to the cost finding objective designed
to accumulate the manufacturing costs and assign them to the units produced and the flow
of these cost through manufacturing accounts. (Buehiman David M. curtin Dennis P.
(1998) )

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1.2 Background of the organization
Messfin G/slassie & Ezwti Belay metal manufacturing partnership is found in Aksum. It
is about 24 kilo meters away from mekele capital city of tigray. The factory was
established in 2006 E.C by initial capital of 2,000,000 birr on mutual agreement of the
Tigray region.
At the time the organization was established in order to
1. As other similar organizations by making profit payment of more dividends to
stock holders and increase the production capacity.
2. Giving service by producing metal tools for the society on a reasonable price.
The recent status of the factory has 67 workers of those female workers are 36 and the
categorizes of workers according to their profession.
Degree holder 18
Diploma holder 46
9-12th grade 3
1-8th grade 0
Literate 0
Total 67
The performance of the factory activity is based on corporate plan, which is prepared at
the beginning of the year. The plan is divided quarterly as the figure indicates to control
the activity of the factory.

1.3 Statement of the problem

Technological advancement and growing need of mankind had been the prime cause
for today’s dynamic business environment. So the need for consistent recording in
business enterprises arose. Cost accounting especially for manufacturing
companies, is the key factor for achieving the desired profit since cost
of raw materials, was the major expense.
The company doesn’t properly applied the cost accounting system leads an
organization to problems. It was to say that how organizations plan its operation
without knowing cost centers and costs are more and how to bring down improper

3
 cost increments for certain cost objects (may be machines products etc). How can the
organization know its performances This research tries, to address the effect and gives
some clue as to how to solve the mentioned questions those were the factory of cost
accounting system, the cost of material, labor and manufacturing over head managed
and the treatment of the same as what cost and management accountant professionals
suggests.

1.4 Objectives of the study

1.4.1 General objective

The general objective of the study is to assess whether the organization under
consideration is using cost accounting system in its management in accordance with
standard and theories of cost accounting and to investigate an over view of cost
accounting practices.

1.4.2 Specific objectives of the study

 To examine the system and classification of cost
 Assessing the methods the organization uses to allocate costs from one
departments to another.
 To determine the cost of product.
 To assess the accounting treatment of or spoilage, scraps and management of
wastages used by the factory.
 To assess the standard costing system and variance analysis methods
employed by the firm for control purpose
 To control labor and materials costs.
1.5. Significance of the study
This research paper has the following importance first, the output of the study would help
the factory to correct its problems. Second, in doing the research, the student researcher
would develop research skills and finally, the research paper can be used as a base for
further research.

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1.6. Scope the study
The study would cover as much as possible all cost accounting system which is focused
on Messfin g/slassie & ezwti belay metal manufacturing partnership of the cost
accounting is the back bone for the survival of the company dealing with cost analysis.
Then the research paper is specifically designed to assess the cost department of the
company. And finally recommendations were fore warded about the effectiveness of the
company based on the findings on the data analysis part.
1.7 Limitation of the study
There were so many limitations to complete the project
 Difficult to inspect all aspects of the company
 Lack of transparency in the employees by misunderstanding of the objective
 The major problem of the study is some head of the department were not will in to
give full in formation
1.8 Research methodology
This refers to be the variables over which the data for this study would be collected and
the method that would be used in data collection, analysis and interpretation
1.8.1 Research area
This study would be conducted on cost accounting system of messfin g/slassie & ezwti
belay metal manufacturing partnership located in Aksum.
1.8.2 Source of data
Source of data selection to conduct the study is important because the more valid the
information source, the reliable would be the information receive, which leads to
accounts and good communication so the organization. To conduct the study both
primary and secondary source of data would be used.
A. primary source
The primary source of data on this information source gathered by the researcher.
This include depth interview.

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 B. secondary source
The secondary source of data would include different document and related reports
through investigations and verification of balance related transaction based on
departmental activity of the organization.

1.9.1 Methods of data collection

To understand the study, the researcher would use primary and secondary data collection
tools. The primary data would be collected from primary source, unstructured in depth
interview. There would be filled by respondents from different departments in cost and
budget department and other related finance sectors.
The secondary data were be obtained from different manuals, document and related
reports by reviewing the organization finance record procedure, different finance section
and administrative department of the organization.
1.9.2 Sample and sampling techniques
The sample size of the study was six. They are the cost and budget department and other
department related to cost accounting used for different purposes. For this study the
researcher was used judgment sampling of non probability technique.
1.9.3 Method of data analysis
The collected data would be processed, analyzed and interpreted to report the result of
researcher finding of the selected organization. The data analysis begin by editing and
classifying the collected data in more meaning full and relevant information to the study
by attached documents ( if any) as it is appropriate in conducting the study. Data editing
means the process of examining collected data identify errors and omissions. As to data
classification, the gathered data are arranges and grouped in to similar categories and
generalize the data in order to facilitate the study. The interpreted data would be
summarized and concluded in to meaningful way that can be understood by any
concerned body. Finally narrative sentences would be used to present the study report and
where necessary table would be supported key descriptive way of data analysis by
comparing actual finding with theory in conducting the study

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1.9.4 Organization of the paper
The studies had four separate chapters. The first chapter is an introduction part includes
background of the study, background of the study, and significance of the study, scope
and limitation of the study. Subsequently, chapter two, present important related literature
review whereas, chapter three present the researcher methodology. Chapter four, is about
data presentation, analysis and interpretation and finally, the last chapter five, present
summary conclusion and recommendation.

7
 Chapter two

2. Literature review

2.1. What is cost accounting?

Cost accounting is the process accumulating the costs of manufacturing, and other
functional processes and identifying these costs with units produced or some other object.
It is a unique sub filed of managerial and financial accounting. Cost accounting is applied
primary to manufacturing. Organization that combine and process raw materials in to
finished products (frigo 1986 p, 7).
Management accounting is the process of identification measurement, accumulation,
analysis preparation interpretation, and communication of financial information used by
managements of plan, evaluate and control within an organization to assure appropriate
use of and accountability for its resources. (Cherrington, 1998, p5).
Cost accounting provides information for management accounting and financial
accounting management accounting measures and reports about financial and non
financial information that helps mangers make decision to fulfill the goal of the
organization and financial accounting focus on reporting to external parties (Hrngre,
2003, p 2-3).
Cost accounting provides mangers with relevant cost data to assist them in operating the
business effectively. The management process includes developing an operating plan,
implementing the plan, and evaluating the result of operations. ( cherringon, 1998 p 54).

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2.2 Classification of costs
Costs may be classified and grouped of different purposes for which, costs are measured.
There are several standard cost classifications and each classification has its own unique
terminology.
A. Time period for which the cost is computed
Time can be broadly classified in to past and future. Cost can also be classified
accounting to these time period.
1. Historical costs
Historical costs are those that were incurred in the past period.
2. Budget cost
Budget costs are those that are expected to the incurred in a future period (2nd
edition Cherrington p. 20).
B. Classification by management function
An organization may be separated in to functional areas. A manufacturing in
company’s functional areas generally includes manufacturing, marketing and general
administration.
3. Manufacturing cost
Include costs, from the acquisition of raw materials through production until the
product can be turned over to the marketing devisor to be sold. Manufacturing costs
include the cost of raw materials, payroll cost, for the people working on the product
and incidental costs such as tax payer, depreciation and repairs associated with the
manufacturing equipment (2nd edi. Cherrington p 21).
4. selling cost
Selling costs cost are all costs associated with marketing and selling product. They
include all costs incurred by the marketing division from the time to manufacturing
process is complete until the product is delivered to the customer. These costs include
advertising, promotional offers, freight to deliver the product and warehouse costs
while the product is waiting to be sold (2nd edt. Cherrigton p. 21).

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5. Administrative costs
Administrative costs are all costs associated with the management of the company
and include expenditures for accounting legal and administrative activities. Interest
costs are also included among administrative costs. (2nd edition Cherrington, p21).
C. Classification by accounting treatment
1. Product costs
Product costs consist of all costs associated with the manufacturing function of the
business. They include materials, labor and other factory costs associated with
assembling and processing the unit. Because the company still holds the product and
its usefulness has not yet expired, it is not appropriate to expense these costs. They
are capitalized as inventory and held as unexpired costs until they are sold
(2nd Cherrignton p.22).
2. Capital costs
Capital costs are similar to product costs in that they are also capitalized as assets,
however capital costs is the term used to describe the acquisition of plant and
equipment. These items are capitalized as tangible fixed assets and depreciated over
there useful lives. Product costs are reserved for inventor able costs associated with
the manufacturing process (2nd ed. Cherrington p 22).
D. classification by behavior
Costs behavior describes how a cost changes with time or changes in volume
1. Variable costs variable costs are costs that vary proportionately in total as the
volume of production or sales changes (2nd edit. Cherrington P 23).
2. Fixed costs fixed costs remain constant in dollar amount as volume of
production or sales changes (2nd edit cherrington p 23).
E. Classification by nature of expenses
1. Material cost: material cost is the value of material used to produce certain
product and to facilitate the production activity. This can further be divided in to
direct and indirect material. Direct material cost is that which can be identified with a
specific product and directly changed to the cost of that product where as indirect

10
material cost is that which cannot be identified with specific product and cannot
easily be changed to the cost of that product (Frigo, 1986 p 10).
2. Labor costs:- labor cost is a total cost of a salaries paid for the application of
labor to manufacture a product. Thus, labor cost which is identifiable directly with
specific products is known as direct labor while that parts to flavor cost which cannot
be identified and cannot be changed to the cost of specific product is termed as
indirect labor. ( Frigo 1986 p 10).
3. Factory overhead
A group of expenses that are incurred in the manufacturing of a product and not
classified as direct material or direct labor are known as factory over headed. Such
costs are indirect material, indirect labor, power lights, fuel etc ( Frigo 1986, p10-11).
F. classification by tractability to product
1. Direct cost
Direct cost is one that can be economically traced to a single cost object, the cost
object is a unit of finished product (2nd edition cherrington p.22).
2. Indirect Cost
Indirect costs are one that is not directly tradable to the manufacturing products (2nd
edition cherrington p 22).
G. classification by decision significance
A decision involves making choices among alternative courses of action. The
decision maker generally collects cost information to assist in making the decision
(2nd edition charrington p 23).
1. Relevant costs
Relevant costs are costs that make a difference in a decision making process (Frigo,
1986 p 10.
Irrelevant costs
Irrelevant costs are costs that make a difference in a decision making process (2nd
edition cherrington p 23).

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 H. classification by managerial influence
Managerial influence is the ability of managerial to control a particular costs (2nd
edition, cherrington p 24)
1. Controllable cost
Controllable costs are subject to significant influence by a particular manger with the
time period under consideration (2nd edition cherrintgon p 24).
2. Uncontrollable costs
Uncontrollable costs are those costs over which a given manger does not have a
significant influence ( Frigo 1986, p 105-106)
2.2. Other cost classification
1. Out of pocket costs
Out of pocket costs are costs that must be met with a current expenditure (2nd edition
cherrington p. 25).
2. Sunk costs
Sunk costs are defined as past costs that have already been incurred. Because sunk
costs are historical costs (2nd edition cherrignton p 25).
3. Opportunity cost
Opportunity cost is the cost or value of opportunity fore gone when one curse of
action chosen over another (2nd edition cherrigton p 25).

2.3. Cost recording and accumulation procedures

I, Accounting for material
The material account in manufacturing concern is affected by transaction such as
purchase issues for use, return of unused material spoilage and damages and
obsolescence (2nd edition cherrington p 411).
1. Purchase of Materials
Material purchases have their own treatment for freights, clearing and handling costs.
Such costs can be material cost or manufacturing over head cost which is charged on the
basis of pre determined price which help to identify direct and indirect materials.

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The general rule is that the cost of materials includes the invoice amount plus other costs
paid to put the immaterial in place ready for use at the production facility.
These costs typically include
 The invoice amount
 Shipping costs (Freight in)
 Sales tax
 Cost of delivery container (patters, spools etc) net of return refunds.
 Duty on international shipments.
Trade discount, quantity discount, cash discount (purchase discount), purchase return
should not be included in the cost of material (2nd edition cherrington p 412).
Purchase discount
Purchase discount referred to as cash discounts. It is usually profitable to pay the
invoice within the discount period. Material should be recorded at the invoice price
minus the amount of purchase discounts permitted whether they are taken or not. This
procedure is known as recording purchases net of discounts. Loss discounts are not
considered an inventor able cost; rather they should be treated as a separate item and
shown the income statement as a financing expense (2nd edition cherrington p 413).
Pay after the discount period the journal entry
Account payable --------- ------xx
Purchase discount loss – ------ xx
Cash ------------------------------------------xx

Freight in
Accounting theory recognizes that foreign in is an ordinary and necessary cost of
purchasing materials; there are many different ways to handle frights charges,
depending on the business situation.
Purchase of materials with freight in is journalized as

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 Freight in ------------------ xx
Material inventory -------- xx
Account payable /cash -----------xx
2. Material issued
Accounting for material issued is quite simple. The direct material consumption is
charged to working in process and the indirect material to working in process and the
indirect material to factory overhead (Horngren mark. L, 1986).
The journal entry will be :
Working in process ---------- xx
Factory over head ------------ xx
Material inventory -------------------- xx
Difficulties in accounting for material issued arise when material are purchased at
different time at different prices. This results in different costs fro essentially the
same materials. Materials are issued on the basic of material requisitions.
There are three cost flow of materials assumptions must be consistently applied
for similar categories of materials.
1. First in first out
The cost of the first materials received is assumed to be the cost of the first material
issued.
2. Last in first out
The cost of the last material received is assumed to be the cost of the first materials
issued.
3. Average method
It uses the average costs of materials purchased to determine the cost of materials
issued. An average purchase cost for materials could be calculated monthly or
quarterly and applied to material issued during the corresponding future period.
(Horngren mark. L, 1986 )
2.4. Scrap spoilage and defective goods
1. Spoilage: There are number of ways that materials can be spoiled or lost during
production. Spoilage is a general term the refers to materials that have become bad or

14
unfit for their intended use. Spoilage is the tem generally used when referring to defective
units (2nd edition cherrington p 417).
2. Scrap: is a materials residue from a manufacturing operation that has some value in
excess of disposal costs. Scrap may have relatively minor value, as in the case of steel
(2nd edition cherrington p 418).
3. Defective goods: are products that do not meet quality standards. They may rework
and sold at or near regular price or they may be disposed of for salvage value, depending
on the manufacturing situation (2nd edition cherrigton, p 418).

2.5. Use of cost information

2.5.1. Cost for planning and control

A company of information system provides the data required for the preparation and
operation of budget and for establishing standard costs.
Budget is a quantitative expression of a proposed plan of action by management for a
specific period and an aid to coordinating what need to be done to implemented that plan.
A budget can cover both financial and non financial aspects of the plan and serve a blue
print for the company to flow in an upcoming period. A budget that covers financial
aspects quantities management expectation regarding income, cash flow, and financial
position. Just as financial statement are prepared for future period. For example, budget
income statements, statements of cash flow and budget balance sheet.
Advantages of budget
Budgets are big parts of most management control style (system) some advantages are
listed below.
1. compares strategic planning and implementation of plane
2. provided a frame work for judging performance
3. motivates managers and employees
4. Promotes coordination and communication among sub units within the company
(Horngree, 2003 p 176-177).
Standard cost: closely allied with the budget are standard costs which are
predetermined cost for direct material, direct labor, and factory over head. They are

15
 established by using information accumulated from past experience and data secured
form research studies and it helps the management to form the foundation for the
budget (Hornggren C.T. 2003).

Costing system
The two basic types of costing systems are used to assign cost to product or service.
Which of them are as follows.

Job order costing system

In this system the cost object is a unit or multiple unit of a distinct product or service
called a job. Job order costing system is a type of cost system that provides for a
separate record of the cost of each particular unity of product that passes through the
factory. Job order costing system is commonly used by companies with products that
are unique and divisible. In this product or services. Job is task for which resources
extended in bringing a distinct product or services to market.
(Buehiman David M. curtin Dennis P. (1998.et ).
Examples of business that use job order costing includes.
 Construction system
 Furniture manufactures
 Printing firms
 Repair shops
 Service giving organization
 Garages, etc

Process costing system

In this costing system is used for manufacturing process which produce a single product
or single mix of products continuously for an extended period of time. In this system the
cost of a product or service is obtained by using broad averages to assign cost to mass of
similar units produced for general sale and not for any specific customers. Average cost
over larger number of nearly identical product companies that use process costing system
are as follows (Ronald W. Hilton.et.s).
 Cement factories

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 Petroleum refineries
 Flour companies
 Beer factories
 Textile factories
 Beverage companies
Characteristics of process costing system (Mosich A 1989 Intermediate).
 The products manufactured are homogenous
 The cost are accumulated in department or cost centers
 Each unit produced will receive the same amount of direct material, direct labor
and MOH cost.
 Average unit cost is obtained by dividing total cost to unit produced in a given
department (cost center).
 Costs are divided in to two based on when the costs are incurred in to the
production process.
1. Direct material cost: this cost is usually added aid one time either out the
beginning at the middle or at the end of the production process.
2. Conversion cost direct labor MOH cost
There costs are usually added evenly or uniformly throughout the production
process by respondents from different departments in cost and budget department
and other related finance sectors.
The secondary data were be obtained from different manuals, document and related
reports by reviewing the organization finance record procedure, different finance
section and administrative department of the organization.

17
 Chapter Three

3. Data presentation, Analysis and interpretation

The result and discussion parts of the research was analyzed based on the data collected
through unstructured interview with some supporting documentary evidence such as the
past years costs data. For the discussion the researcher was used the description of data
analyzed.
The study concerned cost accounting section was given great emphasis during data
collection period. The result of the study is based on a number of factors. These factors
include costing system, accounting for major elements of manufacturing costs, flow of
costs accounting treatment in spoilage, scrap, defective goods, standard costing system,
variance analysis and finally cost control mechanisms. But first this chapter treats the
costing system adopted in this particular factory.
Costing system
Costing system refers to the way of accumulating and presenting costs data for the
management of a concern. Basically there are two types of product costing system.
According to all the respondents replied that the type of costing of a product adopted in
the factory is job order costing. By this reason, the factory products are produced in a
batch. When that batch is completed another products is produced in a different batch and
the process move from batch to batch.
Messfin g/slassie & ezwti belay metal manufacturing partnership used manual accounting
system. In manual accounting system, there is a sparate sheet of paper for each job. The
amount of materials, labor and over ahead required to complete the process are manually
posted to the job order sheet. The costs accumulated on the job order cost sheets for
completed job are transferred in to finished goods inventory.
The production departments have five major subdivisions such as forging, machine shop,
sickle, Harding and grinding and painting. The production process start at the forging
division and the production processes completed in different division. But not only single
division each production division performs full part or some part of the total operation.

18
3.1. Personal information
This section presents the summary of the information gathered through questionnaires
from the MGEBMP employs ;officers & auditors;.
Table 3.1.:- Gender Distribution of the Respondents

Sex Respondents Percentage

Male 8 61.5 %
Female 5 38.5%
Total 13 100%

Source : Primary data of 2011 e.c

This table shows majority of the respondents are males that are 61.5% (8) the
remaining 38.5 % ( 5)are females.
Table 3.1.2.:- Education Level of Respondent

Educationlevel respondents Percentage

Certificate - -
Diploma 4 30.7 %
Degree 6 46.3 %
MAS 3 23 %
Total 13 100 %

Source: Primary data of 2011 e.c

Based on the educational level all most (46.3% degree and 23 % MAS) of the
respondents are degree.
All most my respondents are degree. The factory is operated by the employees have
higher educational level.

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Table 3.1.3:- Age of Respondent

Age level Frequency Percentage

Less than 25 2 15.4 %
From 25-35 5 38.5 %
From 36-50 4 30.5 %
Above 50 2 15.4 %
Source : Primary data of 2011 e.c
Based on table 3.2 most of the respondents are on middle age. Then the factoy may have
full confidence on giving social service

Table 3.1.4:- Relationship of Respondent

Relationship respondents Percentage
Single 5 38.5 %
Marriage 8 61.5 %
Divorced 0 0%
Source : Primary data of 2011 e.c
Based on table 3.1.4 respondents 5(38.5%) out of 13 were Single, 5(61.5%) out of 13
were Marriage. Then most of the respondents are Marriage.
Table 3.1.5:- Responsibility in the organization
Responsibility in the respondents Percentage
organization
Employee 4 30.7 %
Officer 6 46.3 %
Auditor 3 3%
Other specify 1 10 %
Source; Own Servey Data , 2018/19 ( 2011 E.C )
Table 3.1.5 indicates most (46.3%) of the respondents have officer responsibility in the
organization.

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 3.2 Analysis of Accounting for the major elements of manufacturing
costs
Table 3.2.1
Question Respondent Percentage
What kind of costing systems are used
to accumulate cost ?
A, job order costing system 13 100 %

B, Process costing system 0

Source ; servey study in MG and EB MMP

According to the study, mesfin g/slassie & ezwti belay metal manufacturing partnership
used (100%) job order costing for accumulation and allocation of costs. Naturally the
manufacturing cost that comes direct materials, direct labors and manufacturing overhead
has its nature in this factory. To indicate from which such cost are incurred.
Table .3.2.2 The flow of costs in the factory
Question Respondent Percentage
What kind of material
purchase of products ?
A, direct material 11 84.6 %
B, direct labor 2 15.4 %
C, manufacturing over 0 0%
head
Total 100.%
Source; survey of study (2011 e.c )

Direct Materials
The direct material costs of this factory consist of the raw materials used for
production of Shelfs, desks of wood, Doors of metal & wood, Beds of metal &
wood, Bolts, According to all respondents replied that the factory is incurred the
huge amount for direct materials purchase. It includes the cost of raw materials
insurance, freight in cost and duty on international shipments.
According to the results obtained from the study materials are acquired by
following the purchasing procedures. Materials request come from different
department according to the study. As the request time if there is no material in
store department, the store department requests the materials to purchase by
purchasing requisition. This requisition approved by the head of management

21
of the factory. It sent to purchasing department, where the actual ordering take
place, it start to search the market to identify supply, it collect the Performa to
choose the supplier, once a supplier has been chosen, the purchasing department
prepares a purchase order to a vendor supply materials.
According to the explanation of the head of store department, the store department
of the factory is responsible for receiving, safe guarding, handling, issuing and
maintaining appropriate accounting record for materials. Materials are delivered
to the store department, inventory record update with the quantity of items and the
date received. Based on the study, for purchase or issue of the materials, the
factory using moving average method for recording times or stock because of the
unit price to determine.

Direct Labor
The person who 4works directly with the raw materials in converting them to
finished goods based on the study, the salaries and wages of employees of the
factory is considered as direct labor. Factory pay monthly payroll to direct labor.
This cost transfer to working process. But, by certain case in sense the shortage of
raw material or breakdown of machine, the employees don’t produce anything at
this time the factory charge labor cost in the form of fixed salary or wage but not
on hourly rate basis. This payment transpire to factory over head.
However, for the reporting purpose labor cost is computed by the recording the
labor hour spent by each employee on the particular job using a special form
called labor report. This report is signal by the foreman and the technical manager
and sent to general accounting for calculation of salary pavement. The summary
of all workers will be passed to cost accounting department so as to allocate costs
to each product.
In the production department there are five sub departments such as foreign,
machine shop, sickles Harding and grinding and painting. A production is
processed at each of these sub departments. Each sub department has a number of
employees for producing product of the factory. In the mesfin g/slassie & ezwti
belay metal manufacturing partnership labor costs are computed at each product

22
 but not at each cost center. Each of the type of product has sheet for recording the
daily labors hours worked.

Manufacturing overhead.
All costs incurred in the factory (MG&EBMMP) that cannot be considered as
direct material and direct labor. These costs that cannot be directly assigned to a
product charging indirect costs like indirect labor, indirect materials, freight in
fuel factory, light and power, telephone defective work, insurance expenses,
depreciation expenses, repairs and maintenance of building and equipment etc.
The well known fact is that the three costs which are indicated above will
determine the profitability of the factory. So, allocating cost asks much more care
and mesfin g/slassie metal manufacturing partnership, Factory used the possible
method and the way of determining unit cost regarding manufacturing costs.

Accounting treatment for scrap and defective unit

Table 3.2.3 the flow of costs in the factory
Years Unit of measurement Quantity Price kg Value
2009 Number 28,289 0.50 14,144.50
2010 Number 99,445 0.50 49,722.50
2011 Number 29,849 0.50 14,924.50
Source : scrap sales of the three years
This table indicate the scrap sales of the three years of the factory. The factory is
accumulated these scrap in store and sold them at the end of the year. From this
the factory got some benefits. This benefit is not deducted from the total cost of
each product. This scrap sale included in the other income. The theoretical aspect
of the scrap do not stated like the mesfin g/slassie & ezwti belay metal
manufacturing partnership treated. According to theoretical aspect the treatment
of scrap identifies scrap with individual jobs and then the value of scrap is
withdrawn from the total cost of jobs.
According to the study, there is a defective unit occurred every years, the quantity
vary year to year.

23
 Table 3.2.4: Scrap sales of the factory
Types of Unit of Produce Defective By additional cost General
product measure dproduc product Unmodifie Modified defective
ment t d product product unit by %
Metal & wood Number 24,895 95 21 74 0.38%
Beds
Metal&wood Number 29,898 104 15 89 0.34%
shelfs 6
Bolts Number 49,991 89 10 79 0.18%
Metal & wood Number 60,927 136 - 136 0.22%
doors
Nuts Number - - - - -
Source; MG & EBMMPs annually defective & modified production report of 2010.
The above table indicate that each of the product have a defective unit except the Nuts.
But they are not more according to the produced products quantity.
The inspector of the MGEBMMP identify the defective units out of the total products in
each production period and also again out of the defective units. Identify rework units for
which incurred cost to modify and sold them at a regular prices. The cost of modified
units is generally assigned to factory overhead and the cost of the defective unit’s means
not modified (rework) are assigned to the expense of the factory (MGEBMMP). In the
period incurred.
The factory’s treatment of defective product is the same as the theoretical treatment stated
in the cost and management accounting.

3.3 Standard costing

Standard costing is one of the variance that shows the costing system of an organization
whose activities consist of a series of common respective operation.
According to the respondents and from self assessment of documents of the factory, they
use standard consisting system of basic standard type which is not updated to the current
situation. This costing system is a predetermined cost estimates that permits management
to know before production starts what the costs should be so that inefficiency and waste
may be detects and controlled at the source. But the decision made based on standard
costing seems distorted since the standard used is the basic standard which is not updated
in reality basic standard cost is the costing system in which it may have been accurate
estimates of costs in the past but it has not been updated to reflect changes, in price and

24
technological changes, then this results in accurate estimates of actual costs. Thus the
decision made based on this standard cost will be greatly influenced and this will not be
much useful for control purpose.
Despite all the above condition the factory is beneficial in using standard costing system
at hand for managerial decision making and control. Thus, it helps in adjusting the
deviation occurred in different costs and operating result i.e by comparing the actual
results with standard, this also help them so take relevant corrective measures.
According to the cost and management professions, standard must be updated
periodically to reflect changes in the structure of a production process but the mesfin
g/slassie & ezwti belay metal manufacturing partnership standards are not updated
periodically to reflect changes.

3.4 Variance analysis

Variance is the different between the standard stated and the actual results. Predetermined
cost figures, results in a standard cost with which the actual cost may be compared to
determine the extent of variance. These variances between the predetermined standard
and actual costs form the basis of managements review to ascertain the causes of such
differences so that inefficiency and waste may be eliminated as far as possible.
According to the results obtained from the study are different accountable bodies when
variance occurs and in addition to this the standard cost also play some valuable role in
variance of each cost. The standard cost still do not revise, Do not take immediate
corrective actions and by this reason the decision made will not be appropriate and
effective control and planned. The managerial decision and controlling activities may not
that much reliable.

25
 Table 3.4.1 Annually defective and modified production report of 2011
Types of product Unit measurement Budgeted Actual Variance
metal &wood beds Number 25000 24,872 128
Bolts Number 27000 26,724 276
Doorswood&metal Number 48000 47,639 361
Nuts Number 61000 60,759 241
Desks Number 35,500 35,105 398
Shelfs Number 36,000 35,924 76
Chisel Number 24,000 23,873 127
Source : MG and EBMMPs budget production variance of 2011
This table indicated the budget production variance of the 2011.
The cost manager identifies the reason for this variance because it helps mangers
to take corrective action that will be incorporated in future budgets.
Based on the study, the factory mainly focuses on one type of variance that is
labor efficiency variance. Here the concern is the causes of this variance.

3.5 Cost controlling mechanism

Cost control is critical for any organization in order to achieve the desired profit
our lined in the budget. According to the study, the MG and EBMMP used
standard costing system to control costs of factory. Once costs have been planned,
the next step , is to see the actual costs are inconformity with the planned costs. It
is in this context that management needs cost data so that responsibility for
incurrence of costs can be identified.
According to the results of the study the budgeted and the actual costs are mostly
agreed. For instance let us have a look at in the following table for the two
Consecutive years for major cost elements.

Table 3.5.1 The budget and actual costs of the two years of the factory
Cost of product Budgeted Actual
2011 2010 2010 2011
Direct material cost 300000 210,000 228000 244440
Labor cost 161,745 157,511 159,361.6 144684.18
Factory overhead cost 259500 239200 245500 270750

26
 actual cost for 2011
=

Budgted for 2011 - Budged for 2010

budgted for 2010
161,745  159,361.6

159,361.6
 98.5%

Labour Cost for 2010  .Budjeted For 2010 - Budjeted For 2011/budjeted For 2011
157,511 - 144,684.18
144,684.18
91.2%

As show in the above table the budgeted and actual costs are almost equal. For instance in
2010 the budgeted actual for labor cost is that the actual costs is 91.2% of the budgeted
and in the year 2009, the actual cost is 98.5% of the budgeted.
If you take direct materials cost for the years respectively 89.5% and 94% of the
budgeted costs. This implies that budgeted and actual costs are almost equal and this
situation under normal circumstance may be considered effective at budgeting and
utilizing it.

27
 Chapter Four

4. Summary of findings conclusion and recommendation

This chapter summarizes the main finds of the study and forwards recommendations
based on the conclusion

4.1 Summary of findings and Conclusion

The study was designed to assess the cost accounting system of the MGEBMMP.It is
also intended to suggest possible solution to the problems identified.
One the basis of the data collected from respondents and more or less information
obtained from a survey of documents, the study has come up with the following
findings presented
Various methods ascertaining costs are available to suit the business need the choice of
particular concern. MG&EBMMP uses job order costing system because of the following
basic characteristic features
 Production ,is undertaken after obtaining customer order
 Each order is different and suited to the requirement of the customer
 Production cycle is usually short period
 Different types of products produced
 Cost accumulation by .job specified number of units
 Unit cost is computed by cost accumulated by job divided by units in the job.
The factory costing system being used currently is job order costing. This system is
inconformity with the type of process in the factories. It is a system that fits to the
operation styles of the MGEBMMP.
Like cost and management accounting profession stated MG&EBMMP has cost flow
from work in process up to the finished goods inventory sold them. This cost flow the
same as the theoretical aspect of cost and management accounting is stated.
The major elements of manufacturing costs are direct material, direct labor and factory
over head. An examination of the accounting treatment for the major elements of
manufacturing costs revealed the following:
According to the study, direct, material represent substantial part of the cost of goods
manufactured in the factory material purchased by following purchasing procedure.

28
Stock ledger are maintained ,for each type ,of material with the help of source document
such as good received note and store issue voucher any purchase or issue of materials is
accented on separate ledger. A receipt is debited and issue of materials to the production
department is credited to the stock ledger the balance being computed immediately by
moving average method.
The factory control the stock level based on bin card. At the end of the year stock taking
is done to analyze the physical movement of items determine the current balance and to
identify the inventory items that are damage, lost or obsolete.
The MGEBMMP paid fixed salaries and wages to employees monthly. For the financial
report purpose labor cost is computed by recording the labor hour spent by each
employee, on the particular job multiplying by the rate for a product. This payment
transfer to working process. But the employees don’t produce anything by the case of the
factory which pays the fixed salaries to employees. This payment transfers to the factory
overhead.
The factory has factory over head rate for each product as a standard The factory over
head cost allocate to each type ,of product based on its own over head rate. For the
allocation of over head to products, the factory using labor cost as a basis.
According to the study the inspector of the factory identify the defective product out of
the total product after that incur additional cost for modified product. This cost incurs to
sell the product at regular prices.
For product costing purposes, the total costs of material assigned to work in process
includes scrap. The factory is accumulated these scrap in store and sold them to the melt
company at the end year the value of scrap in the factor included in the other income.
The additional cost incurred for modified products treated as factory overhead but not
modified by additional costs are assigned to the expense of the factory in the .period
incurred. The accounting treatment of the scrap value don’t deduct with individual jobs.
According to the study the factory used standard costing of basic standard type which is
not up dated to the current situation. This costing system is predetermined cost estimates
that permit management to know before production starts what the costs should be so that
in efficiency and waste may be detected and controlled at the source. This standard
costing is not accurate estimate of cost.

29
 For cost control the MGEBMMP used standard costing system. The factory used this
technique for finding the variance where as concerning variance analysis the result shows
that mainly lobar efficiency variance. This variance occurred by different reasons.
According to the study, difference labor, negligence of employees. The labor efficiency
variances are occurred due to the negligence of employee this help to take better remedial
actions. The results of the study indicates that the actual cost is almost agreed with the
budgeted cost. Cost control mechanism is effective and variance still exists.

4.2 General Recommendation

Contextually cost accounting is defined as the processing and evaluation of operating
cost data to provide information for external reporting, internal planning and control of
ongoing operating cost and special decision making. This cost and managerial purposes it
deserves to recommend that every company should include it under its operation Factory
(MGEBMMP) is not an exception for these facts. The factory has included most of the
cost accounting system and practices Nevertheless, the researcher needs to recommend
the following .
 The factory should be revised the standard costing because the factory used is
not up dated to the current situation. This standard costing is not accurate
estimates of cost hence it has a substantial impact on the decision made.
 The factory should be given incentive to motivate and training to develop
skills employee at the work place and outside the work place like workshops
etc.
 The factory should adjust the treatment of scrap because the treatment of scrap
is not identify with individuals jobs and deduct from the individual product
costs. Hence, it has a substantial impact on the decision of pricing means
increases the price of product. This tends to the management of the factory set
or determine based on the cost by this reason it increase the price of product.
This price is may be more than the price of other company those import and
distribute product. By this reason the customer may be shifted to other.
 The factory loss customer and decrease the income of the factory.
 The factory should deduct the scrap value from individual job cost.

30
 References
 Cherrington, 1998, cost Accounting a managerial approach 2nd edition.
West pulishing company, new York.
 Hornggren C.T. 2003, Cost accounting a managerial emphasis 11th
edition USA person prentice hall.
 Horngren mark. L, 1986, cost accounting, Har courst Barece
Jovanovich, publisher.
 Horngren C.T. 1992, cost Accounting a managerial emphasis 9th edition
USA person prentice hall.
 Buehiman David M. curtin Dennis P. (1998) cost accounting A
managerial emphais, new Jersy, printice Hall.10th edition.
 Ronald W. Hilton , Michael W. maher and Fralk H. selto (2000) cost
management strategies for business decision, by MC Graw mill
companies 3rd edition USA
 Mosich A 1989 Intermediate Accounting 6th edition USA.
 Frigo 1986 , cost accounting, 2nd edition new York.
 Hrngre B. 2003 Intermediate managerial Accounting 7th edition USA ,).

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 Appendixes
Aksum University
College of Business and Economics
Department of Accounting and Finance
Dear Respondent
This questioner is aimed at collection information about the cost accounting system ( in
case of messfin g/slassie and ezwti belay metal manufacturing partnership ) as a
requirement for partial fulfillment of bachelor of art degree in accounting & finance ,
therefore I need your best answer to the ff questions & all information in safe regarding
with strict confidentially. Thanks for your advance & response. put a tick in the box.
PART 1: PERSONAL INFORMATION
1. Age
A, Less than 25 C, From 36-50
B, From 26- 35 D, above 50
2. Gender
A, Female
B, Male
3. Relationship
A, Single C, Divorced
B. Mirage
4. Highest educational level
A, Certificat B, diploma
C, Msc D, Degree
5. Responsibility in the organization
A, employee C, officer
B,internal auditor D, other specify

32
 PART 2 : QUESTIONS RELATED TO COST ACCOUNTING SYSTEM
1. For what purpose use cost information the management of the factory ?
2. Which department has authority to determine the price of the products?
 Head of the management department
 Head of the accounting department
 Head of the purchasing department
 Head of the production department
3. What are the products of the factory?
4. from where the production process of the factory starts? And complete?
5. When the production departments produce the products?
 Every day produce some number of units
 There is customer order
 both
6. Who is report the defective products?
7. Is the production department control the employee to work properly an production
schedule?
Yes  No 
8. what are the responsibility of the store department ?
9. When the factory taking of inventory?
 At the beginning of the fiscal year
 At the end of the fiscal year
10. What kind of costing systems are used to accumulate cost ?
 job order costing system
 Process costing system
11. How the organization accounts the spoilage scrap and defective units ?
12. Do you have in your organization a standard costing system yes  No
13. if yes what type?
 Basic standard (not up dated)
 Theoretical standard
Other specify
14. What is the benefit of using standard costing?

33
15. who is responsible to appoint when variance occur?
 Accountants
 Responsibility center managers
Other specify
16. Who is responsible to take remedial action to correct variance S?
17. Do the actual costs usually agree to the budgeted cost? Yes  No 

34