CHAPTER ONE

1. INTRODUCTION

1.1. Background of the Study

Cost accounting is used by a company's internal management team to identify all variable and
fixed costs associated with the production process. It will first measure and record these costs
individually, then compare input costs to output results to aid in measuring financial performance
and making future business decisions. (Investopedia)

Cost is usually defined as a resource sacrificed to achieve a specific objective, usually expressed
in monetary terms (Horngren et al, 2000). 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. The purpose of cost
accounting is to provide key cost information to managers for their decision making. It provides
information for both management accounting and financial accounting. In general, the objective
of cost accounting is to act as a decision-support system for management to improve
performance. In manufacturing firms, Cost accounting provides information for achieving and
sustaining a competitive advantage through manufacturing excellence which requires attention to
all aspects of performance (Turney, 1989).

Cost accounting is the process of accumulating the costs of a manufacturing process and
identifying them with the units produced. Management at all levels within an organization has
the responsibility of the planning, coordinating, executing and controlling business operations. A
large part of the 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.

In planning cost accounting deals with the future. It assists to budget or predetermines material
costs, labour and manufacturing, selling and distribution overhead. These costs may be used for
determining process and measuring performances.

1
Besides, they help management in decision making concerning 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 an estimate the
cost that has been incurred in a factory to manufacture specific products. One of the methods is
job order costing are readily identified by individuals units batches which deal with broad
average and masses of different units. This method is the application of costs to specific jobs.
Which may be either a single physical unit or a few similar units? This method is construction,
garment factories, furniture manufacturing, metal tools factories, printing, 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 method is mainly used
whenever the output of individual’s processes is reasonably uniform or homogenous, as inflow
milling, cement manufacturing, etc.

Generally, the cost accounting Practice 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.

As Lanen et al., 2011 stated cost accounting continues to experience dramatic changes. Cost
accounting information system designed to provide valuable information is useful for the
management of the company to assist them in the exercise of its various functions of planning,
control and decision-making where management needs cost information-accurate, fast and
reliable. The system of cost information is an important source in many administrative decisions,
such as pricing decisions, determination of the optimal mix of products, and measurement of the
cost of operations within the company, eventually evaluation of the results. (Alahdal et al, 2016).
Cost accountants must work with the users (or customers) of cost accounting information to
provide the best possible information for managerial purposes (Lanen et al, 2011).

In this paper, the researcher will try to show the assessment of cost accounting practice cases of
AHFA PLC.

2
1.2 Background of Ahfa Food Processing Plant
Ahfa Food Processing plant, established was in 1992, which is It occupies a pioneering status
signaling a breakthrough in the onset of industrialization in Ethiopia. Over the last twenty year
decade of its existence, this giant industry had been consistently running a wealth of experience
industrial production and marketing mix of food products. AHFA PLC has grown into far
reaching reputation. For mounting quality test of its product among the consumer all over the
country. Ahfa food processing plant located at the between ‘Saris Abo’ and ‘Kality square’
located from Addis Ababa. Currently the factory runs three production lines with annual
production capacity of 375, 000 Quintals of production. And supply of high quality OCHE Pasta,
OCHE Macaroni, OCHE Shortening, OCHE vegetable Ghee, OCHE Margarine and Wheat
Flour, they are also involved in trading activity in which it buys , Paraffin Wax, Glycerin, LD
politely, Inner tube, and the primary and sole distributor of OCHE Sunflower oil. There is
another service to provide Transport Service,

1.3 Statement of the Problem

Cost accounting includes those parts of both financial and management accounting that collect
and analyze cost information. Managers require information which is relevant, accurate and
readily available to formulate and operationalize functional strategies and to make decisions on
product costing and preparation of financial reports. It provides the product cost data required for
special reports to management and inventory costing in the financial statements. Production costs
include all costs incurred in the manufacturing company from the receipt of the raw materials
and supply of labour and services until production is completed and the finished product is
packed with the primary packing (Prasad, 1981).

The drive for this study is, even if cost accounting has manifold advantages, such as the above
listed benefits for organizations, based on the preliminary study performed during 2020 by the
researcher the company under this study has a problem to entertain such benefits from its costing
system.

Another drive of the research is as Drury and Tayles (2005) state that over the three decades,
most of the research focused on cost system design has concentrated on studying ABC systems.
Previous studies have assumed that cost systems consist of two alternatives, either traditional or
ABC systems. On the other hand, researchers in developing countries, assert that there is a lack

3
of knowledge concerning the current state of management accounting practice in developing
countries (Joshi, 2001).

As per the knowledge of the researcher & reviewed literature, there have been a number of
studies relating to cost accounting in the developed countries and very few in the developing
countries. But most of the existing research literature (e.g. Tewodros, 2009, Mintesinot, 2013
and Yohannes, 2018 have done similar research in different sector) on accounting in Ethiopia
manufacturing companies mainly focused on financial accounting, financial management,
information technology adoption and credit accessibility for manufacturing companies in
contrary limited emphasis given to cost accounting and its practice.

Therefore given the significant economic importance of Ahfa food Processing plant and the gap
in the literature, the researcher believed that studying cost accounting practice studies similar to
the developed countries will be useful to encourage the development of improved cost
accounting practices. Based on this information the researcher had been initiated to asses and
examine the company’s cost accounting system for the purpose of identifying the causes

1.4 Research question

This study has a general research question of assessing “How cost accounting Information is
developed and utilized by Ahfa food Processing plant”. The specific research questions include
the following:

1. What is the cost accounting Practice of the factory?

2. Are the company's cost accounting information help managers to make effective
decision?
3. How to managed Cost Material, labour, and manufacturing overhead?
4. What type of cost accounting method is used by the company?

4
1.5 Objective of the Study

1.5.1 General objective

The general objective of this study is to assess and examine the cost accounting practice utilized
by the company under study to identify the real causes of why the main research problem is
occurring and existing in the company; and finding possible solution to overcome the identified
real causes.

1.5.2 Specific objective

The student research has planned some specific activities to be performed to answer (find the
solution ) of each specific questions to find out the point where the real causes of the main
problem are located as specific objective of the study; and will be started as follows:

A. To asses cost accounting Practice of the factory

B. Evaluate company's cost accounting information help managers to make effective
decision?
C. To identify How to control and managed Material cost, labor and manufacturing
overhead?
D. To identify type of cost accounting method is used by the company?

1.6 Significant of the Study

A research in the area of the cost accounting practice of manufacturing companies is relevant for
several reasons. First, since business activities, being dynamic, require decisions by management
almost on a daily basis. The study will be beneficial to the management of the company to
understand the cost behavior and will able to make the right decision in the sphere of planning
and managing the costs at different levels of activity for alternative courses of action. Without
cost information, management may not be able to respond to the demands for on the-spot
decisions which today's dynamic business situations require. The finding of the study will try to
provide an insight about the overall image of the costing system; it suggests some possible
recommendations for further betterment of the system which may help the organization in
enhancing its costing practice. Subsequently the attainment of organizational goals will be
greatly improved.

5
In addition, the benefit of sharing information among researchers is another reason for the study.
Thus, the information provided in the study will be useful to researchers who might want to
undertake further research into the area of cost accounting practice.

1.7 Scope and limitation of the study

1.7.1 Scope of the study

The study would cover as much as possible all cost accounting application and its problem which
is focused on Ahfa food processing plant. And finally recommendation is forwarded about the
effectiveness of the company based on the findings on the data analysis part.

1.7.2 Limitation of the study

Every study has its own limitation. No study can be perfect and carried out as expected due to
recurring changes in environment.

This study has its own limitation. Those are:-

 Time and financial constraint to go every day and collected the data in detail

 Some staff members were unwilling to give the required information

1.8 Organization of the study

The study has four separate chapters. The first chapter is an introduction part includes the
background of the study, the significance of the study, and the scope 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.

6
 CHAPTER TWO

2. LITERATURE REVIEW

2.1. Introduction
This chapter seeks to review literature of existing bodies of literature on the subject of the
research. The chapter analyzed theoretical and empirical evidence findings, showed the research
gap and finally presents summary of literature relevant to the study.

2.2 Definition of Cost

Cost' is not easily defined. The following quotations highlight the meaning of cost: Alchian
(1972) states that 'in economics, the cost of an event is the highest valued opportunity necessary
forsaken. The usefulness of the concept is a logical implication of choice among available
options. Only if no alternative were possible or if amounts of all resources were available beyond
everyone's desires, so that all goods were free would the concept of cost and choice be
irrelevant.' For accounting, Sprouse and Monnitz (1962) define cost as 'an exchange price, a
forgoing, a sacrifice made to secure benefits. Kohler (A Dictionary for Accountants, p.139)
defines cost a “an expenditure or outlay of cash, other property, capital stock, or services or the
incurring of a liability therefore, identified with goods or services purchased or with any loss
incurred, and measured in terms of the amount of cash paid or payable or the market value of
other property, capital stock, or services given in exchange.”

2.3 Cost Accounting

Cost accounting is defined in such a wide variety of ways by different authors as follows:

 Cost accounting addresses the informational demands of both financial and management
accounting by providing product cost information to external parties (stockholders,
creditors, and various regulatory bodies) for investment and credit decisions and for
reporting purposes, and internal managers for planning, controlling, decision making, and
evaluating performance. (Kinney et al., 2011)
 Cost accounting attempts to satisfy costing objectives for both financial and management
accounting. When cost accounting is used to comply with a financial accounting

7
 objective, it measures and assigns costs in accordance with GAAP. When used for
internal purposes, cost accounting provides cost information about products, customers,
services, projects, activities, processes, and other details that may be of interest to
management. The cost information provided plays an important support role for planning,
controlling, and decision making. This information need not, and often should not, follow
GAAP (Hansen & Mowen, 2006)
 Cost accounting is a conscious and rational procedure by accountants for accumulating
cost and relating such costs to specific products or departments for effective management
action. Such costs are used in balance sheets and income statements for the purposes of
stock valuation and income determination (Layne, 1984).
 Cost accounting as an information processing system includes a series of ordered and
logically connected activities. The key purpose of these activities consists in translating
data on the use of resources involved in the company’s operations into information which
reflects the costs of specified reference objects (Nowak and Wierzbiński, 2010).
 Cost Accounting (or costing) can be defined as the process of collecting, classifying,
assigning and analyzing the costs associated with the activity of an organization (Blocher,
2005).
 Cost accounting is the process of measuring, analyzing, and reporting financial and non-
financial information related to the costs of acquiring or using resources in an
organization. For example, calculating the cost of a product is a cost accounting function
that meets both the financial accountant’s inventory-valuation needs and the management
accountant’s decision-making needs (such as deciding how to price products and
choosing which products to promote). However, today most accounting professionals
take the perspective that cost information is part of the management accounting
information collected to make management decisions. Thus, the distinction between
management accounting and cost accounting is not so clear-cut. (Horngren et al, 2018).

Both the above definitions defined cost accounting as providing relevant financial and non-
financial information for both management and financial accounting. Therefore, this study has
adopted the Horngren et al., (2018) definition which suggests that the cost accounting task is to
provide information for both Management and financial accounting.

8
2.4 Advantage of cost accounting
Coe (1981) states that the allocation or assignment of costs and expenses to products or services
results in cost data available for:

1. Pricing annual or periodic physical inventories.

2. Maintenance of reasonably accurate monthly or periodic dollar inventory
total for financial statement purposes without the taking and pricing of
physical inventories more often than perhaps one year.
3. Aid in setting selling price.
4. Recovery of costs from customer under contract providing for
reimbursement of actual costs or escalation based on specified cost data.
5. Make-or-buy studies.
6. Profit planning
7. Analysis of operations and operating deficiencies.
8. Control of costs and expenses.
9. Capital budgeting decisions.
10. Numerous other managerial decisions.

2.5 Elements of manufacturing cost

Three terms commonly used when describing manufacturing costs are direct materials costs,
direct manufacturing labor costs, and indirect manufacturing costs. These terms build on the
direct versus indirect cost distinction of manufacturing costs.

2.5.1 Direct materials

Costs are the acquisition costs of all materials that eventually become part of the cost object
(work in process and then finished goods) and can be traced to the cost object in an economically
feasible way. The costs of direct materials include not only the cost of the materials themselves,
but the freight-in (inward delivery) charges, sales taxes, and customs duties that must be paid to
acquire those (Srikanth et al., 2018).

9
2.5.2 Direct manufacturing labor
Costs include the compensation of all manufacturing labor that can be traced to the cost object
(work in process and then finished goods) in an economically feasible way (Srikanth et al., 2018)

2.5.3 Indirect manufacturing

Costs are all manufacturing costs that are related to the cost object (work in process and then
finished goods), but cannot be traced to that cost object in an economically feasible way. This
cost category is also referred to as manufacturing overhead costs or factory overhead costs
(Srikanth et al., 2018

2.6 Use of cost information

2.6.1 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 implement 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 statements are
prepared for past period. So can financial statements be prepared for future period for example a
budgeted income statement, statement of cash flow and budgeted balance sheet?

2.6.2 Advantages of budget

Budgets are big part of most management control style (System) some advantages are listed
below,

 Compares strategic planning and implementation of plane

 Provided a framework for judging performance.
 Motivates managers and employees
 Promotes coordination and communication among sub units within the company
(Horngren, 2003 pp, and 176-177).

10
2.7 Costing system

2.7.1. 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 quantity of product that passes through the factory. Job order costing
system is commonly used by companies with product that are unique and divisible. In this
system costs are assigned to a distinct unit, batch or lot of product, or service. Job is task for
which resources expended in bringing a distinct product or services to market (Cherington, 1998,
p 277).

In this system, the cost object is a unit or multiple units of a distinct product or service called a
job. Each job generally uses different amounts of resources. Each job generally uses different
amounts of resources. Job costing is suitable when it is required to obtain the cost of a Job or a
specific order or a batch of finished products (Prasad, 1981).

Examples of business that use job order costing includes

 Construction system
 Furniture manufactures
 Printing firms
 Repair shops,
 Service giving organization
 Garages, etc

2.7.2 Process costing system

In this costing system is used for manufacturing process which produces 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 unites
produced for general sale and not for any specific customers. Average cost over large number of

11
nearly identical product companies that use process costing system are as follow (Cherrinqton,
1998 p 278).

In this system, the cost object is masses of identical or similar units of a product or service. The
focus of a process cost system is the cost center to which costs are assigned. It is usually a
department, but it could be a process or an operation. Costs accumulated by a cost center are
divided by the number of units produced in that cost center to compute the cost per unit. The
primary objectives, like that of the job order cost system, are to compute the unit cost of the
products completed and the cost to be assigned to the ending work in process inventory
(Vanderbeck,2010).

 Cement factories
 Petroleum refineries
 Flour companies
 Beer factories
 Textile factories
 Beverage companies

2.7.3 Activity-based costing (ABC)

It is a cost accounting system that focuses on an organization’s activities and collects costs on the
basis of the underlying nature and extent of those activities. Multiple predetermined overhead
rates are then calculated using the various cost drivers of organizational activities. ABC focuses
on attaching costs to products and services based on the activities conducted to produce, perform,
distribute, and support those products and services.

Activity based costing (also known as ABC costing) refers to the allocation of cost (charges and
expenses) to different heads or activities or divisions according to their actual use or on account
of some basis for allocation i.e. The three fundamental components of activity-based costing are

 recognizing that costs are incurred at different organizational levels,

 accumulating costs into related cost pools, and
 using multiple cost drivers to assign costs to products and services.(Michael &
Cecily, 2011)

12
2.7.4 Building Blocks of Costing System
Cost assignment is a general term for assigning costs, whether direct or indirect, to a cost object.
Cost tracing is a specific term for assigning direct costs; cost allocation refers to assigning
indirect costs.

 Cost pool. A cost pool is a grouping of individual indirect cost items. Cost pools can
range from broad (such as all manufacturing-plant costs) to narrow (such as the costs of
operating metal-cutting machines). Cost pools are often organized in conjunction with
cost-allocation bases.
 Cost-allocation base. A cost-allocation base (e.g., number of machine-hours or number of
labor-hours) is a systematic way to link an indirect cost or group of indirect costs to cost
objects.

2.8 Techniques of costing

The following techniques of costing are used by the management for controlling costs and
making managerial decisions:

2.8.1. Traditional Costing

A. Historical (or Conventional) Costing
It refers to the determination of costs after they have been actually incurred. It means that cost of
a product can be calculated only after its production. This system is useful only for determining
costs, but not useful for exercising any control over costs. It can serve as guidance for future
production only when conditions continue to be the same in future.
B. Standard Costing
It refers to the preparation of standard costs and applying them to measure the variations from
standard costs and analyzing the variations with a view to maintain maximum efficiency in
production. What is done in this case is that costs of each article are determined before-hand
under current and anticipated conditions, but sometimes they are determined before-hand under
normal or ideal conditions. Then actual costs are compared with the predetermined costs and
deviations known as variances are noted down. Thereafter, the reasons for the variances are
ascertained and necessary steps are taken to prevent their recurrence.
Standard costing is one of the most known and widely used product costing systems. Standard
costing was developed for the needs of a traditional production environment which differ

13
significantly from the needs of a modern days’ production environment. This costing system
suits best an organization whose activities consists of a series of common or repetitive operations
and the input required to produce each unit of output can be specified. Standard costing is also
suitable for organizations that produce many different products with a series of common
operations. Standard costing is a widely used accounting system because it can create
information for a lot of purposes: decision-making purposes, providing challenging targets to
achieve, assists on setting budgets, acts as a control device by highlighting unwanted activities
and simplifies the task of tracing costs to products for profit measurement and inventory
valuation purposes. (Drury 2004)
C. Marginal Costing
The marginal costing concept is based on the principle that each cost unit should be charged only
with those costs which it exclusively caused to be incurred, this method is also known as direct
costing or variable costing (Layne, 1984).It refers to the ascertainment of marginal costs by
differentiating between fixed costs and variable costs and the effect on profit of the changes in
volume or type of output. In this case, only the variable costs are charged to products or
operations while fixed costs are charged to profit and loss account of the period in which they
arise.
D. Absorption Costing
Absorption costing is based on the premise that the normal costs of running a firm should be
charged to the individual cost units in order to ascertain the total cost of each unit. By such an
exercise, the cost units absorb the total costs. The product units are thus charged not only with
direct cost, but also with a fair share of the overhead cost (Layne, 1984). According to Kinney
and Rail-born, 2011, absorption costing treats the costs of all manufacturing components (direct
material, direct labor, and variable overhead and fixed overhead) as inventoriable, or product,
costs in accordance with GAAP. Absorption costing is also known as full costing. Under
absorption costing, costs incurred in the non-manufacturing areas of the organization are
considered period costs and are expensed in a manner that properly matches them with revenues.
In addition, absorption costing presents expenses on an income statement according to their
functional classifications. A functional classification is a group.

14
2.9. Activity of a firm

2.9.1 Definition of a firm

According to Layne 1984 a 'firm' is made up of human beings who are organized towards
economic objectives. A firm acquires scarce resources from the environment, and utilizes such
resources for production. By 'production' is meant the transformation of inputs into an output (or
outputs) of a distinct, different form; some value should be attached to this output (or outputs) by
a particular society. For production to take place there must also be availability of resources
which include raw materials and labor; finance and capital goods.

2.9.2 Stage of production

The production or conversion process can be viewed in three stages:
1. work not started (raw materials),
2. work in process, and
3. Finished work.
Costs are associated with each processing stage. In the first stage of processing, the cost incurred
reflects the prices paid for raw materials and/or supplies. As work progresses through the second
stage, accrual-based accounting requires that labor and overhead costs related to the conversion
of raw materials or supplies be accumulated and attached to the goods. The total costs incurred in
stages 1 and 2 equal the total production cost of finished goods in stage 3.
A manufacturer must account for raw materials, work in process, and finished goods to maintain
control over the production process. An accrual accounting system is essential for such
organizations so that the total production costs can be accumulated as the goods flow through the
manufacturing process. (Jesse, et al., 2011)

2.9.3 Cost driver

A cost driver is a variable, such as the level of activity or volume that causally affects costs over
a given time span. For direct costs there is a readily measured cause and effect relationship
between the change in either the level of activity or volume (kilograms of DM used) and a
change in the total costs. For other production costs, such as the cost of plant security, which

15
benefits all distinct cost objects, the measure of benefit may be the computer space required to
store surveillance records of distinct areas in the plant. The larger the storage space, the higher
the assumed benefit for the distinct cost object.
The cost driver of a variable cost is the level of activity or volume whose change causes
proportionate changes in the variable cost. For example, the number of vehicles assembled is the
cost driver of the total cost of steering wheels. If setup workers are paid an hourly wage, the
number of setup hours is the cost driver of total (variable) setup costs. Costs that are fixed in the
short run have no cost driver in the short run but may have a cost driver in the long run. Costing
systems that identify the cost of each activity such as testing, design, or setup are called activity-
based costing systems.

2.10 Role of cost accountants

Cost accountants collect, assimilate, collate and analyze all financial information related to an
organization. Their main role is to ensure that managerial decisions are within cost prescriptions.
Cost accountants in today’s highly competitive and dynamic business environment need to
understand the various functions or links such as customer service, marketing, distribution, etc.,
in the value chain of a business. This understanding of the various links in the value chain of a
business is particularly important when the business concerned is involved in international trade.
This has resulted in cost accountants moving away from traditional manufacturing cost
approaches to more inclusive approaches. This move towards more inclusive approaches has
resulted in cost accountants factoring cost of value chain activities such as engineering, sales,
distribution, service, etc., into product costing. In this context an individual who is well versed in
the numerous definitions relating to costs and comprehends the shifting definitions of costs
ranging from short run to long run can be extremely invaluable in identifying information which
is critical for decision making. The importance of management and costs accounting has grown
exponentially in the recent past. The reason for this can be attributed to a number of factors such
as increased competition both locally and internationally which has been exacerbated by
globalization, growing input costs on account of changing macroeconomic conditions, declining
profit 15 margins, etc. In order to mitigate these recent challenges, companies in the developing
world have started implementing management and costs accounting practices which are widely
used by companies in the developed world (Kariyawasam, 2018).

16
2.11 Summary and literature gap
The literature review has unfolded certain points in terms of the scope and application of cost
accounting techniques. The major literature gaps are revealed as follows:
 Cost management is one of the most significant issues in company performance and
company financial management.

 Cost control has a positive impact on organizational performance and also the style of
management has a positive impact on organizational performance.

 Decision-making can be improved through the integration of cost accounting principles

for appropriate costing of products and services through the provision of accurate cost
accounting information.

 Cost reduction strategy should be embarked with emphasis on selling and distribution
overhead cost and office and administrative overhead cost.

 Enterprises could utilize cost management systems in order to survive and to reach their
goals.

 Organization goals such as competitive pricing and profitability cannot be reliably achieved
unless industry participants possess a full understanding of their company’s cost structure.

 Firms are successful in capturing accurate cost and profit information from their ABC cost
systems for value chain and supply chain analysis.

 Most of the Activity Based Costing research was done in developed countries and very few
in developing countries.

 The basic difference between ABC and traditional costing is that while traditional costing
assumes that products consume sources during production, ABC assumes that sources are
consumed by activities rather than products and those products consume the said activities.

17
The above Literature review highlights most of the studies so far conducted are mainly
discussing that are related to the different elements and aspects of cost accounting systems. Some
studies also covered cost systems and techniques and others are also related to cost accounting
practices, but there are no in-depth specific study has been conducted covering substantial
aspects on the cost accounting practices related to Ethiopian manufacturing companies on the
best knowledge of the researcher. The scanning of literatures give an indication that there exists a
gap in the existing study and a study is needed that include cost accounting system of Ethiopian
manufacturing companies.

18
 CHAPTER THREE

3.1 Research Methodology

3.1.1 Research Design

A descriptive method is used to state the purpose of the study where accomplish through the data
collected from secondary and primary source. After information was gathered through the
employed methods, the clarification and analyzing will be done through both quantitatively and
qualitatively. The data will be presented and analyzed by using different tools such as SPSS,
tables and percentages

3.2 Population and sampling Technique

3.2.1 Population
The study target population focused on 26 management, finance department and productive
employees of the company’s head office located in Addis Ababa, Factory production head and
store staffs a population in the assessment of the practice of costing of the company.

3.2.2 Sample
Purposive sampling method is used to select respondents for the questionnaire and interview
respectively. In purposive sampling, people or other units are chosen, as the name implies. For
instance, we might choose people who we have decided are “typical” of a group or those who
represent diverse perspectives on an issue (Leedey & Armored, 2005)

3.2.3 Types and sources of data

In order to undertake the study, the researcher use both primary and secondary sources of data. In
other way, the researcher use both qualitative and quantitative types of data.

3.2.4 Method of data collections

For the successful accomplishment of the study, the researcher use both primary and secondary
sources of data.

A. primary source
Primary data gathered through an interview, which is to be conducted with the Top
manager of the company as well as other related General Manager, Finance manager and
Production Plant manager.

19
 B. Secondary source
Secondary data gathered from Cost and budget section department and annual financial
Report Company, book of the company and. How the company treat costing system in
practice.

3.3 Method of Data Analysis

The collected data 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 as it is
appropriate in conducting the study. Data editing means the process of examining collected data
identify errors. 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.

3.4 Justification for the selection of the targeted respondents

The focus of the research is on the professional employees and this was done to the
administration of the study. Though not a strong stance, the respondents are selected because
they can easily understand and give valid responses to the question provided, as compared to the
illiterate. If the targeted respondents are illiterate which have not information and knowledge
about the subject matter, the study will be forced to be conducted through interview which is
time consuming and very difficult to achieve within the given short period of time. Hence, the
student researcher has limited his attention on the professional respondents.

20
 CHAPTER FOUR

4. PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Introduction 
As per the schedule out lined in the first chapter, this part consists of the responses of
respondents, presentation of data obtained from the company's profiles and analysis and
interpretation of the data. As most of the data collected mainly form selected department heads,
background information about respondents will have an important role for confirmation of the
data. The chapter first present the data analyzes the presented data in accordance with the
objectives of the study and finally interprets on that data.

Products and the factory mange's a total of 205 employee labor.

Table 4.1 Number of staff

Description Male Female Total

Total employee 135 70 205

Source: HRM department, 2020

Table 4.2 the number of productive and supportive employees

Description Number of employee Percentage

Productive 94 45.853%

Supportive 111 54.146%

Total 205 100%

Source: HRM department.2020

Table 4.3 distributed and returned questionnaires

Questionnaires Number of respondents Percentages of respondents

Returned 26 100%

21
 No returned - -

Distributed 26 100%

Source: questionnaires, 2020

In the accomplishment of the study 3 questionnaires are distributed to collect primary data, and
from those all are collected. According to the responses of the responding who have just returned
the questionnaires the researcher make the analysis part. The following table shows the
distribution of personal information (gender, age, education & job experience) of the
respondents.

Table 4.4 Personal information about the employees.

Gender Respondents number Percentage

Male 14 53.84%
Female 12 46.16%
Total 26 100%
Age
Below 20 years - -
20-40 years 20 76.92%
Above 40 years 6 23.08%
Total 26 100%

22
 Educational level

Below 12 grade 2 7.69%

Diploma 5 19.23%

Degree 16 61.54%

Master 3 11.54%

Above master - -

Total 26 100%

Job experience

Below 2 years 2 7.69%

2-5 years 18 69.23%

5-10 years 5 19.23%

Above 10 years 1 3.85%

Total 26 100%

Source: questionnaires, 2020

According to above table 4.4 the total numbers of respondents 53.84% are male and 46.16% are
female. The respondents range from 20-40 years, 76.92% and 23.08% of above 40 years, the
respondent's age fall between 20-40 and above 40 and below 20 years did not mentioned about
their age. Education is the base for any organization to implement its objectives. The above table
shows that almost all of the respondents 7.69% are 12 grades, 61.54% are first degree holders,
19.23% respondents are diploma holders and 11.54% master. As respondent's gives information
greater than 7.69% employees are served for 2 years, 69.23% employees are served for 2 to 5
years, 19.23% served for 5 to 10 years and the rest 3.85% served for above 10 years.

23
The working forces are composed of professionals and nonprofessionals. The professionals are
engineers, mechanics, administrators, and accountants and so on ranging from first degree to
second degree.

The company purchases the raw materials from local and import, local purchased raw material is
private agricultural organization and other industries, imported from Indonesia and Dubai.

Ahfa food processing plant has three major departments and one service namely; finance,
production, technique, Logistics, and human resource development and administration, there of
the departments and the services are directly responsible to the general manger as it can be
observed from the organizational structure.

4.2 Cost Accumulation Methods

4.2.1 Cost Center

Cost center is a work unit of Ahfa food processing plant company and could also be a location or
an item or equipment in relation to which costs may be ascertained and used for effective cost
control. The work unit is therefore, first categorization into cost centers through which the
various products passes or works is done. Accordingly under the current production process the
cost center of Ahfa food processing plant are:

 Shortening and Margarine Cost center

 Vegetable Ghee Cost center
 Pasta Cost center
 Flour Cost Center

Cost Objects of Ahfa food processing plant the products for which a measurement of cost is
desired due to this fact the output that are produced in each cost center are the cost object to
which all direct and indirect manufacturing costs assigned. Thus the ultimate cost object is the
major products:

 Shortening
 Margarine
 Vegetable Ghee
 Spaghetti

24
  Macaroni
 Wheat Flour

However, considering the types of packing materials consumed bay these production and
packaging of same products with various packing materials the following are the cost objects of
Ahfa food processing plant:

 OCHE Shortening 16kg (to used baking)

 OCHE Margarine 20kg (to used ice-cream)
 OCHE Vegetable Ghee 12kg (to used cooking)
 OCHE Vegetable Ghee 15kg (to used cooking)
 OCHE Yellow Shortening 14kg (to used baking)
 OCHE Macaroni 10kg
 OCHE Spaghetti 10kg
 OCHE Macaroni 25kg
 OCHE 2nd Grad Macaroni 25kg
 OCHE Cracked Spaghetti 25kg
 OCHE Elbow Spaghetti 25kg and by - Product

4.2.3 Cost Pools

Cost Pools are group of cost that are typically used to distribute indirect costs to cost objects
based on the magnitude of the cost drivers that are assumed to have a cause and effect
relationship with the consumption of resources. Hence, the cost Pools identified in the Ahfa food
processing plant are:

 Depreciation of production Machinery Cost Pool

 Depreciation of Factory Building Cost Pool
 Depreciation of Common Fixed assets Cost Pool
 Plant Manager Cost Pool

4.2.4 Cost Drivers

One of the manufacturing cost or manufacturing Overhead Costs are accumulated in their
respective cost pools, In the first stage, all cost accumulated in the cost pools allocated based on
production output.

25
4.3 Direct and indirect cost of the company
Like other manufacturing company, Ahfa food processing plant has direct and indirect cost
associated to the product. Direct costs of a cost object are costs that are related to the particular
cost object and can be traced to it in an economically feasible way. Such costs are:

4.3.1 Direct Cost

1. Direct Material Cost is costs that the company uses to produce finished products. For
flour milling consumed Raw material wheat, shortening, margarine and vegetable ghee
consumed raw material Palm oil, Palm sterine and also ingredient Ghee flavor, Black
olive Flavor, monogolaycrid, Flour-Enrichment, water and salt. Pasta and macaroni
consumed raw material Wheat Flour as well as using the packaging materials and in each
cost center are directly to the cost of that product.

2. Direct Labour Cost is the cost the can be identified with a product and incurred for the
workers who are directly and fully involved in converting raw material into the desired
output using various production machines

Direct Labour costs are cost of salary and wage, over time, leave pay of employees paid
for the direct application of labour to manufacture a product.

4.3.2 Indirect Cost

1. Manufacturing overhead or Indirect cost of a cost objects are costs that are related to the
cost object but that cannot be traced to it is an economically feasible way incurred in the
practices of manufacturing product and are not charged as direct material or direct labour
costs a particular cost centers. Such costs are in indirect materials cost, depreciation,
electricity and water, repair and maintenance, fuel, stationary, insurance, Employee
uniform and outfit, medical Expense, factory Other cost and others.

26
4.4 Costing system of the company
Table 4.5 Computerized costing system

Question Alternative Number of respondents

In your company costing Number Percentage

system is computerized?
Yes 19 73.07%

No 7 26.92%

Total 26 100%

Source: questionnaires, 2020

As in the above table 4.5 shows, 73.07% of the respondents says the company costing system is
computerized. This indicate computer systems are now relied on for a broad spectrum of duties,
including bookkeeping, business communications, product design, manufacturing, inventory
control, and marketing. The remaining 26.92% of respondents says the company does not use
computerized costing system.

Table 4.6 Organization a standard costing system

Question Alternative Number of respondents

Do you have in your Number Percentage

organization a standard
Yes 26 100%
costing system?

No - -

Total 26 100%

Source: questionnaires, 2020

As respondent's gives information for Ahfa Food Processing plant, company use a standard
costing system. Standard costing system provides standard cost for budgeting purpose to plan
future performance. Standards are predetermined and it helps organization to achieve its

27
objectives in economic and efficient manner. Functions of standard costing system are:
valuation, planning and controlling.

Table 4.7 Costing system using

Question Alternative Number of respondents

If question above yes Number Percentage

answer what type of costing
basis standard 15 57.69%
system use?
theoretical standard - -

Other 11 42.30%

Total 26 100%

Source: questionnaires, 2020

According to table 4.7 shows, 57.69% of the respondents said company use basis standard
costing system. Basis standards are fixed scientifically and hence it is more of technical job. The
remaining 42.30% of respondents says the company uses other standard system like normal
standards.

4.5 Product costing system methods of the company

Table 4.8 Cost accounting methods used by the company

Question Alternative Number of respondents

What type of cost Number Percentag

accounting methods used e
by the company?
Job order costing - -

Process costing 17 65.38%

28
 Process costing and Activity 9 34.62%
based costing

Total 26 100%

Source: questionnaires, 2020

The information on gathered from the questionnaires in the above table 4.8 shows, 65.38% of the
respondents says the cost accounting method of Ahfa Food Processing plant is used process
costing methods. The remaining 34.62% of respondents says the company use both process and
Activity Based costing. Process costing is used for manufacturing process is produce a single
mix of products continuously for an extended period of time. According to current information,
Ahfa food processing plant use process costing Method and those costs are assigned to finished
products and Work-in-process using the Activity Based Costing Method. Accordingly, the
process cost accumulated method in Ahfa food processing plant all Direct Material Cost and
Direct Labour Cost are accumulated in each cost center and assigned to each product produced in
the cost center Ahfa food processing plant on the other hand, manufacturing overhead cost
accumulated in the cost pool and the charged to Cost centers and ultimately to finished products.

Unit Cost = Total cost/Number of units completed during the period

In process costing system, it is necessary to establish specific process costing centers which are
usually processing departments.

4.6 Recording system of company

Table 4.9 System of recording transactions

Question Alternative Number of respondents

What is the system of Number Percentage

recording transactions?
Double entry accounting 26 100%

Single entry accounting - -

Total 26 100%

Source: questionnaires, 2020

29
According to the respondents response 3(100%) of respondent said that Ahfa food processing
plant recording system of transaction is double entry accounting system. One advantage of using
double entry accounting is that it provides check and balances, which prevent fraudulent activity
and reduces errors.

4.6.2 Product of the company

Table 4.10Main products of company manufactured

Question Alternative Number of respondents

What are the main products Number Percentage

your company
Consumer products 26 100%
manufactured?
Shopping products - -

Business products - -

Specialty products - -

Unsought products - -

Total 26 100%

Source: questionnaires, 2020

As respondent's gives information above table 4.10 shows, 100% of the respondents says Ahfa
food Processing plant produced by consumer product.

4.7 Allocation of production costs

4.7.1. Direct material cost allocation

It is the most significant elements of cost and accounts for a higher percent of the total cost of
production. Then materials issued summary as per monthly material consumption register will
give the data for materials consumed for each product. Issue vouchers indicate cost centers
together with the type of product to be produced with the material. Monthly totals of material
consumption register and agree with that of the general account registers.

30
4.7.2 Direct labour cost allocation
Table 4.11Charge labor cost

Question Alternative Number of respondents

How do you charge labor Number Percentage

cost?
On hourly rate basis

In the form of fixed salary 26 100%

Total 26 100%

Source: questionnaires, 2020

The remaining 100% respondents said, that employees charge the labor cost in the form of fixed
salary they allocated by each cost center.

4.7.3 Factory over heads cost allocation

The factory also use actual overhead rate which is the rate at which overhead cost are actually
incurred during an accounting period. Table 4.11 Production activity rate in by each cost center

Production activity Rate = Production/Cost Object in by each Cost center

Total Production Output in accounting period

MOH amount by each cost center = Actual over head by each Cost Pool

Production activity Rate

Cost allocation base, in Ahfa food processing plant they used when allocating the indirect cost
pools appropriate cost allocation base. (Source: Interview with the finance).

4.8 Transferred-In-Cost
Transfer-in-cost refer to the costs incurred to produce semi-products in a given cost center (that
is wheat four in the Flour Cost center) and transferred to the next cost center (Pasta Cost center).

When semi-product are transferred from one cost center to another cost center, the total cost of
the transferred semi-product be accumulated as transferred-in-costs in the subsequent cost center.

31
4.9 Work-In-Process Inventory
In Ahfa food processing plant the shortening and margarine that are produced and packed but not
transferred to the finished Goods store they treated as Work-In-process inventory of the
shortening and Margarine cost center.

The pasta Bothe short-cut pasta (Macaroni) and long cut pasta (Spaghetti) they are produced
packed and not yet transferred to the finished Goods store they treated as Work-In-Process
Inventory of the pasta cost center.

The Flour that are produced packed and not yet transferred to the finished Goods store treated as
Work-In-Process Inventory of the Flour cost center.

By the end of Each Month, the inventory crew takes physical inventory of the shortening,
margarine, spaghetti, macaroni, and flour and prepare work-In-Process Inventory count sheet and
provide to the cost section.

The Valuation of ending Work-In-Process Inventory on the basis of moving weighted average
unit cost of each product in determining the unit cost, however, the former method is assumed to
be correct By Product recognition at time of production.

4.10 Cost of Scarp, by-Product, and wastage

In Ahfa food processing plant production process main product such as OCHE Shortening,
OCHE Macaroni, (short-Cut Pasta), OCHE Spaghetti (Long-Cut Pasta), OCHE Margarine, and
OCHE Flour. In addition the production processes also result in scarps, by-products, and wastage
in the parts that follow, the costing of the scarps, by-products, and wastage is described in detail.

Ahfa food processing plant production process, scarp occurs from shortening and margarine Cost
center, Pasta cost center, and Flour cost center to take steps to control the scrap The total scrap
that occurs in the all cost center accounted for as acceptable and unacceptable scrap.

The company use by - product recognition at the time of sales because these technical violations
are permissible because the Birr amount of the by - Products is immaterial.

In product costing, the cost of direct materials includes cost of scrape, waste and normally
anticipated spoilage that occur in ordinary course of production process. Unanticipated or

32
abnormal amount of scrape, west and spoilage should be expressed in the period incurred or, in
some situation, may be included in the factory overhead.

The cost of by-product accounting method is normally known. These are production and sales
method. The production method recognized the byproduct at the time of production. The sale
method delays recognition of byproduct until the time of sale. Scarp is a left over or residue after
a product has been manufactured. Accounting treatment of scarp are:

 Normal scales price realized of negligible scarp is treated as other income in cost
account.

 A scarp account is opened with the full amount of the scarp of the process or job if
such a scarp value is significant. Process account or job account is given credit by the
value of scarp. The scarp account is closed by the balance either (source interview
with finance manager).

4.11 Cost statement

AHFA food processing plant prepares cost of goods manufacturing statements monthly, and then
the total amount for the year is added for the preparation of financial statements income
statements. It is this measurement that shows profitability of the company. Therefore, the need
for reduced production costs is given great attention in attaining the organizational objectives.
Reports of the cost of income statements are shown below (source; observation from annual cost
reports) generally the costing system of the company is relevant and satisfactory because the
employee of accounting departments are composed of the first degree level and few of them are
above degree. In order to present accurate and timely cost information to the head finance
manager and there must be an effective costing system design and implemented with
independent responsible cost department. Then according to the above expression, investigating
and evaluation of the annual financial statements of the company and profitability of the
company. Making proper decisions is directly related to the degree of accuracy of the
information received. Accurate cost information is a product of effective and efficient costing
system of a company. Therefore, designing an efficient costing system that would provide
mangers with accurate information is unquestionable. Then Ahfa Food Processing Plant is reality
to take about accurate cost information from current costing practice

33
 AHFA PRIVATE LIMITED COMPANY
COST OF GOOD SOLD
FOR THE YEAR ENDEDJULAY 7 2019

beginning balances:
8,819,905.
Raw materials 45
1,641,671.
finished goods 13
7,358,440.
packing materials 10
work in progress -
17,820,016.68
Add: purchases:
229,764,929.
Raw materials 72
15,152,416.
MOH 57
20,713,238.
Packing materials 15
265,630,584.44

Cost of goods manufactured available for sale 283,450,601.12

Less: Ending balance

29,603,210.
Raw materials 68
47,969,000.
finished goods 44
9,319,431.
packing materials 84
86,891,642.96

Cost of goods sold 196,558,958.16

34
AHFA PRIVATE LIMITED COMPANY
STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED JULY 7 2019
Currency: Ethiopian Birr

7/7/2019 7/7/2018
REVENUE

Sales 1,341,361,525.15 1,283,790,966

Cost of Sales 1,233,253,806.51 1,123,949,213
Gross Profit 108,107,718.64 159,841,753

Other Income 8,021,305.48 2,559,736

116,129,024.12 162,401,489

EXPENSES
Selling and Administration 75,477,776.09 61,174,533
Operating Profit 40,651,248.03 101,226,956

Financial Charges 26,589,972.20 15,784,561

Audit fee 150,000.00 150,000
26,739,972.20 15,934,561.00
Net profit (loss) for the year 13,911,275.83 85,292,395
Profit Tax Expense 5,187,860.09 26,586,137
Net profit (loss) After Taxation 8,723,415.75 58,706,258
Transferred to legal reserve fund 400,000
Transferred to Profit & Loss Account 8,723,415.75 58,306,257.60

35
4.12 Purpose of the company use the product costing.
Ahfa food processing plant use product costing for three purposes. According to the respondents
costing has three purposes mainly.

Table 4.12 Purpose the company use the product costing

Question Alternative Number of respondents

For what purpose the Number Percentage

company use the
For setting price purpose 13 50.00%
product costing

For control purpose 4 15.38%

For financial statements 9 34.62%

Total 26 100%

Source: questionnaires, 2020

As in the above table 4.12 shows, 34.62% of the respondents says the purpose of the company
use the product costing for financial statement. It is importance is to prepare a schedule of cost
good manufactured as schedule of cost of goods sold, and an income statement. 15.38% of the
respondent says the purpose of the company use for cost controlling purpose like raw material
and packing material. The remaining 50.00% of the respondents said that company use the
product costing for setting price purpose.
Each of them is listed below.

1. For financial statement: reporting papoose Ahfa Food Processing plant costing is also
used for purpose financial statements. Its importance is to prepare a schedule of cost of
goods manufactured a schedule of cost of goods sold, and an income statement.
2. For setting price purpose: Pricing a product is one of the important ingredients in
profitability decision and major determinant for the factory to share the market. The
pricing approach adapted by Ahfa food processing plant is cost plus pricing approach.

36
 3. The reason to choose cost for product pricing are:-
- Because of practical simplicity: there is not sufficient time to price a product
through demand and marginal cost analysis and so the manager of this factory
must rely on a quick and straight forward method for selling price. As a good
starting point, product cost gives the factory’s manger the place to start product
pricing.
- To maintain the margin in order not to price product below their cost and then by
minimizing the degree of loss.

4. For control purpose: The cost estimate embodies the standard against which actual costs
incurred during production can be measured. The data can be used to correct adverse
situations. (Source: Interview with the finance manager).
Table 4.13 Prepare cost statement of company

Question Alternative Number of respondents

Is there prepare cost Number Percentage

statement of company?
Yes 26 100%

No - -

Total 26 100%

Source: questionnaires, 2020

According to the Information gathered through the questionnaire, above table 4.13 shows,100%
of the company prepare cost statement because, making proper decision is directly related to
cost, accurate cost information is a product of effective and efficient costing system of a
company.

4.13 Cost data for decision making

Mangers expect the cost data as much useful as required so that various usable economic
decisions can be drawn from it. As a result the cost accountant has the highest responsibility of
presenting the cost data in a way that makes decision makers understand easily, interpret and
make decision based on it.
37
Selling prices of manufactured goods in Ahfa food processing plant are set based on two
important factors. The cost of production which is directly related to input price. As cost of
production increase selling price accordingly will increase to retain the profit margin at its
original amount. The other is the demand factor. (Source: Interview with the finance manager).

4.14 The company problems applying cost accounting

Table 4.14 Problem faced by applying cost accounting

Question Alternative Number of respondents

what problem faced by Number Percentage

applying cost
It is the expensive 3 11.54%
accounting

It increases work load 23 88.46%

It is unnecessary for cost - -

control

In applicability - -

Total 26 100%

Source: questionnaires, 2020

The respondents answer the question regarding to problem faced by company applying cost
accounting in above table 4.14 shows, 88.46% of respondents says it leads to unnecessary
increase work load of the cost accountants. Whereas the remaining 11.54% of respondents says it
is expensive because analysis, allocation and absorption of overheads require considerable
amount of additional work. Cost accounting lacks of a uniform procedure, there is no stereotyped
system of cost accounting application to all industries. There are widely recognized cost concepts
but understood and applied differently by different industries. Cost accounting can be used only
by big enterprises.

38
 Table 4.15Ethical problems faced by company

Question Alternative Number of respondents

What type of Ethical Number Percentage

problems faced by company?
confidentiality - -

Integrity - -

Both 26 100%

Total 26 100%

Source: questionnaire, 2020

The information on gathered from the questionnaires in the above table 3.15 shows, 100% of the
respondents says ethical problems faced the company in both confidentiality and integrity of the
cost accountants. Cost accountants must carefully safeguard payroll records, product costs and
individual product or departmental profit because if improperly used by other entities or even by
hostile personnel within organization. Another issues that cost accountants faced by integrity,
particularly when faced with difficult tasks that may surpass their training or level of experience.

4.15 Roles, responsibilities and accountabilities of cost accountant in Ahfa

Food Processing Plant

4.15.1 Roles of Cost Accountant

Cost accountants play important roles in Ahfa food processing plant. He/she is responsible to
provide the right information about cost and budget at the right time to management to help them
for their decision making particularly for planning and controlling.

Responsibilities of cost accountant:

 The cost accountant is responsible to build cost that is the preparation of the master budget.
 He/she is required to revise the selling price.
 He is responsible to make monthly and annual inventory of finished goods and fixed
assets.

39
  Cost accountant is responsible for cost flow process starting from procurement up to
distribution.
 Cost accountant shows whether cost is properly classified or not

(Source: Interview with the cost accountant).

Duties of cost accountant

 Cost accountant has the duty to provide information whether costs is placed for the
required purpose or not.
 Cost accountant has the duty to record and formalize transactions in a formal manner and
also preparing yearend adjustments.
 To prepare corporate budget of the company.
 To compute manufacturing costs each year.

4.15.2 Accountabilities of cost accountant

Cost accountant is also responsible for exclusion as incursion of costs in building up of costs at
the proper amount, time and place. He is accountable to provide proper information about the
flow process.
Eg. What actually occurs and exists
Procurement  production  warehouse  selling

4.16 Purpose for cost accounting information need

Managers expected the cost data as much useful required so, that various usable economic
decisions can be drawn from it. As a result the cost accountant has the highest responsibility of
presenting the cost data in a way that makes decision based on it. And it also the company used
cost information to prepare financial statements for to show the company's financial
performance. Managers use the information produced by cost accounting techniques to direct
day-to-day operations and supply feedback to evaluate and control performance.

Costing aid to management as follow:

 Cost accounting aid price fixation

 Cost accounting helps in making estimates

 Cost accounting eliminates wastage

40
  Cost accounting helps in determining and enhancing efficiency

 Cost accounting in helps in inventory control

(Source: Interview with finance manager).

4.17 In what frequency do you request cost information

The company needed cost information in the weekly basis for the control of its operations and
manager made necessary decision on timely.

4.18 Techniques used to the company reduce cost

Currently, the company is incurring a large amount of costs but still maintaining the quality
reducing its production cost using the following techniques:

 Replacing and maintaining the old machinery with the new ones so, that timely
maintenance cost is highly reduced and its help to increase the machine capacity.

 Encouraging the domestic suppliers of raw materials so that inputs can be purchased
with much lower price than the imported once. (Source interview with finance
manager).

41
 CHAPTER FIVE

5. CONCLUSION AND RECOMMENDATION

5.1. Introduction
This chapter conclusion obtained from the findings of the research study. Recommendations are
also provided making use of research findings and suggestions for further studies.

5.2. Conclusion
This study was designed to cost accounting application and its problem Ahfa food processing
plant. The summery of the where studies were as follows:-

 The company is used process costing and method is producing a single mix of products
continuously for an extended period of time.

 The company uses cost for their product pricing purpose and for preparation of their financial
statements. This pricing approach used to fix the desired profit percentage of the company.
The preparation of financial statements also used to know its net income and net loss.

 As respondent gives information Ahfa food processing plant. Used double entry accounting
system, it provides check and balances, which prevent fraudulent activity and reduce errors.

 The company charge labor cost fixed salary for each cost center.

 The company costing system is computerized. This indicate computer systems are now relied
on for a broad spectrum of duties, including bookkeeping, business communication, product
design, manufacturing, inventory control and marketing.

 The main products of the produced Ahfa food processing plant Is consumer products.

 The problems faced by company applying cost accounting includes are: - It leads
unnecessary increase work load of the cost accountants and it is expensive.

 There are several types of ethical problems that cost accountants may face. The major ethical
issues are: confidentiality and integrity of cost accountants.

42
 Purpose cost accounting information to manager is various usable economic decisions can be
drawn from it. And it also to use for control purpose.

 The Existing system does not provide report idle labour and machine hours and idle cost
rather dump idle costs to the products produced during that period resulting in over costing
the products produced during the period when idle hours.

5.3 Recommendation
 In least developing countries like Ethiopia there is problem in cost accounting practice. In
order to cost products efficiently and effectively and run the business by controlling costs
and increase its profit timely, modern costing method has to be implemented.
 As concluding remark, forward some recommendations on the Ahfa food processing plant
costing practices. The basic problem of this company is price differentiation that used to
produce the same products. This comes from the purchase of same raw material from
different suppliers who sell their materials at different price. These different price but same
raw materials cause different cost of products produced. This can be eliminated by buying
raw materials from one reliable supplier.
 The company assumed to have second position as compared to the factories in the county
next to heavy industries. Among the second ones, it is found on the leading position with
its sales volume and smooth operation. So that it has the power to attract highly qualified
professionals for its supportive departments with good pay and employee benefit. But most
of the productive department employees found at lower position is not qualified as their
position require, even though they acquired the position by long experience. As result poor
labor productivity will occur which in turn affect cost? Therefore the company has to plan
to replace employees in the long run.

 The General and Administrative expense are not include the manufacturing costs
determined in the general and administrative Expense shall include the salary expense and
all fringe benefit, Deprecation of fixed assets, interest expense, office running expense,
insurance expense, and other. All expense determined, they shall be allocated to all types
of products based on their total cost that are incurred for products produced by the
company and merchandises purchased for resale.

43
REFERENCES

1. Cherrington, 1998, Cost Accounting A Managerial Approach 2nd Edition. West

publishing company, new York.

44
2. Cheringtion, HubardE.Dee, Luthy David H. Jowen, 1998, Cost Accounting
Managerial Approach.

3. Charles, T. H., Srikant, M. D. &Madahav V. R. (2015). Cost Accounting: A

Managerial Emphasis-Global edition (15th ed.)

4. Cohen, S. &Kaimenaki, E. (2011). Cost Accounting Systems Structure and

Information Quality Properties: An Emperical Analysis. Journal of Applied
Accounting Research, (Vol. 12, No.1, pp. 5-25)

5. Cohen, S.,Venieris, G. &Kaimenaki, E. (20o5). ABC: Adopters, Supporters, deniers

and Unawares. Journal of Applied Accounting Research, (Vol. 12, No.1, pp. 5-25).

6. Cokins, G. C. &Capsuneanu, S. C.(2010). Cost drivers: Evolution and benefits.

Theoretical and Applied Economics (Vol. XVII, No. 8(549), pp. 7-16).

7. Fess Waren, 1999, Accounting Principles, 18th edition.

8. Frigo mark. L, 1986, cost accounting, Har Court Barece Jovanovich, publisher.

9. Horngren C.T. 2000,Cost Accounting a Managerial Emphasis 11th Ed. USA person
prentice hall.

10. Horngren C.T, 1991, Cost accounting, a managerial emphasis 9thed U.S.A, Person
prentc hall.

11. Mahar, Michal 1997, Cost Accounting 5th edition, Chicago, M, Craw Hill.

12. Mosich A, 1989, Intermediate Accounting 6th ed. U.S.A

45