ASSESSMENT OF COST ACCOUNTING SYSTEM OF KOTEBE

METAL TOOLS FACTORY

A RESEARCH PAPER SUBMITTED TO DEPARTMENT OF

ACCOUNTING AS PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR BACHELOR OF ART (BA) DEGREE IN
ACCOUNTING

PREPARED BY : SALIH JEMAL

SUBMITTED TO : ESHETU YADECHA (MA)

JIMMA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING

May, 2012
Jimma, Ethiopia
 Acknowledgement

First and for most great thanks are given to almighty Allah. He has
helped me in every aspect of my life. Next I greatly appreciate my advisor
Ato Eshetu Yadecha, for his through reading of the paper, valuable
comments, suggestion and his kind full appreciation. I would like to
thanks Jimma University, especially college of business and economics
for designing this program.
I also greatly respect and favor my beloved parents who support my life.
Finally, I would like to thanks for all my friends who help me. The last
but not the least, my thanks go to W/ro Yordanos Admassu who helped
me in secretarial service.

I
 Abstract
The study “Assessment of cost accounting system” was conducted on
Kotebe metal tools factory. The main objective of the study is to assess
whether the organization under consideration is using cost accounting
systems in its monument 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.

II
 Table of contents

Acknowledgement................................................................................................................I
Abstract...............................................................................................................................II
Table of contents................................................................................................................III
List of tables........................................................................................................................V
Chapter one..........................................................................................................................1
1. Introduction..................................................................................................................1
1.1. Background of the study..........................................................................................1
1.2. Background of the organization...............................................................................3
1.3. Statement of the problem.........................................................................................5
1.4 objectives of the study...............................................................................................6
1.5.The specific objectives of the study...........................................................................6
1.6.Significance of the study...........................................................................................6
1.7. Scope the study.........................................................................................................6
1.7. Limitation of the study..............................................................................................7
1.8. Organization of the paper.........................................................................................7
Chapter two..........................................................................................................................8
Literature review..................................................................................................................8
2.1. What is cost accounting ?.........................................................................................8
Classification of costs......................................................................................................9
2.3. Cost recording and accumulation procedures.........................................................12
2.4. Scrap spoilage and defective goods........................................................................15
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..............................................................................................17
Chapter Three....................................................................................................................19
3. Research methodology...................................................................................................19

III
 3.1. Research area.........................................................................................................19
3.2. Source of data........................................................................................................19
3.3. Methods of data collection.....................................................................................19
3.4. Sample and sampling techniques...........................................................................20
3.5. Method of data analysis.........................................................................................20
Chapter Four.....................................................................................................................21
4. Data presentation, Analysis and interpretation..........................................................21
4.1. Accounting for the major elements of manufacturing costs..................................22
4.2. Standard costing.....................................................................................................28
4.3. Variance analysis...................................................................................................29
4.4. Cost controlling mechanism..................................................................................31
Chapter Five.......................................................................................................................33
5. Summary of findings conclusion and recommendation............................................33
5.1 Summary of findings and Conclusion.....................................................................33
5.2 General Recommendation.......................................................................................36
References..........................................................................................................................37
Appendix............................................................................................................................38

IV
 List of tables
Table 1 the flow of costs in the factory.............................................................................26

Table 2: Scrap sales of the factory.....................................................................................27

Table 3 Annually defective and modified production report of 2010...............................29

Table 4 The budget and actual costs of the two years of the factory.................................31

V
 Chapter one

1. Introduction

1.1. Background 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 with in 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.
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, garment factories, furniture manufacturing, metal tools
factories, printing, etc.

1
The second method is process coting 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 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.

2
 1.2. Background of the organization
Kotebe metal tools factory (KMTF) is located in north east part of Addis Ababa, the
capital city of Ethiopia a woreda 28 kebele 02. The factory was established in 1969 G.C
by initial capital of 2,000,000 birr on mutual agreement of Ethiopia and Poland
governments. The contribution was made both kind and on cash which the polish
stokeholds were.
1. Poland government
2. polcomex SA company and
3. Mr. Wefold K.pusta
And on the Ethiopian side the stock holders were :
1. Ethiopian investment corporation on behalf of Ethiopian government
2. At Gebreyes Begna
At the time the organization name was Ethiopian metal tools PLC which is having
starteged with the object of
1. As other similar organizations by making profit payment of more dividend to
stock holders and increase the production capacity.
2. Giving service by producing metal tools for the society on a reasonable price.
Kotebe metal tool factory produces stone hammer, Hing, speade axe , pick axe, sickles,
shovel chisel and so on.
After the change on policy of the government of Ethiopia the factory become totally
owned by Ethiopian government and dropped the first objective of the factory and
operated under the ministry of industry of the social is Ethiopia. Until today it is owned
by the government basic metal and engineering. The recent status of the factory has 177
workers of those female workers are 28 and the categorizes of workers according to their
profession.

3
Degree holder 9
Diploma holder 20
9-12th grade 44
1-8th grade 59
Literate 45
Total 177
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.

4
1.3. Statement of the problem
Technological advancement and growing need of mankind has been
the prime cause for to days 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 ,is the
major expense
The company doesn’t properly applied the cost accounting system
leads an organization to problems. It is to say that how an
organization can plan its operation without knowing cost centers and
costs are more and how to bring down improper cost increments for
certain cost objects (may be machines products etc). How can the
organization know its performances. This research tries,to address the
following questions and gives some clue as to how to solve the
mentioned questions.
 What is the cost accounting system of the factory ?
 How is the cost of material, labor and manufacturing over head
managed?
 Does the treatment is the same as what cost and management
accountant professionals suggests?

5
1.4 objectives of the study
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.

1.5.The specific objectives of the study

1. To examine the system and classification of cost
2. Assessing the methods the organization uses to allocate costs from one
departments to another.
3. How to determine the cost of product.
4. Assessing the accounting treatment of or spoilage, scraps and management of
wastages used by the factory.
5. assessing the standard costing system and variance analysis methods employed by
the firm for control purpose
6. How to control labor and materials costs.

1.6.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.

1.7. Scope the study

The study would cover as much as possible all cost accounting system
which is focused on kotebe metals tools factor 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 recommendation were fore

6
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 willing to give full in formation
 Time and financial constraint to go every day and collected the
data in detail.

1.8. Organization of the paper

The study have four separate chapters. The first chapter is an introduction part includes,
background of the study, background of the study, 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

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 with in 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).

8
Classification of costs
Costs may be classified and grouped of different purposes for which, costs are measured.
There are several standard cost classification 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 accouting
to these time period.
1. Historical costs
Historical costs are those that were incurred in the past period.
2. Budget cost
Budget cost are those that are expected to the incurred in a future period (2 nd 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 include manufacturing, marketing and general
administration.
1. 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).
2. 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).

9
3. 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. (2ndedition Cherrington, p21).
C. Classification by accounting treatment
1. product costs
Product costs consists 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 un expired 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 inventorable 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 edi. Cherrington P 23).
2. fixed costs fixed costs remain constant in dollar amount as volume of production
or sales changes (2nd edt 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 can not be identified with specific product and can not
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 can not
be identified and can not 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, p 10-11).
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 is 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 (2 nd
edition, cherrington p 23).
2. Irrelevant costs
Irrelevant costs are costs that make a difference in a decision making process (2 nd
edition cherrington p 23).

11
 H. classification by managerial influence
Managerial influence is the ability of managerial to control a particular costs (2 nd
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 (2nd edition cherrington p 24)

2.2. Other cost classification

1. Out of pocket costs
Out of pocket costs are costs that must be met with a current expenditure (2 nd 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 ocst or value of opportunity fore gone when one curse of
action chosen over an other (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).

12
 1. Purchase of Materials
Material purchase 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.
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 with in 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).

13
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

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 (2nd edition, Cherrington, p 416-417).
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.

14
 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. ( 2 nd
edition cherrigton p 417).

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
unfit for there 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 reworked
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 ablue
print for the company to flow in an up coming period. A budget that covers financial
aspects quantities management expectation regarding income, cash flow, and financial

15
position. Just as financial statement are prepared for future period. For example, a 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 mangers and employees
4. Promotes coordination and communication among sub units with in 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
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 (Frigo 1986, p 97).

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.
(2nd edition Cherrington, 1998, p 227).

16
 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 lager number of nearly identical product companies that use process costing system
are as follows (Cherrington, 1998 p 278).
 Cement factories
 Petroleum refineries
 Flour companies
 Beer factories
 Textile factories
 Beverage companies
Characteristics of process costing system (charrington , 1998 p 314).

 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).

17
 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 times 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 through out the production process.

18
 Chapter Three

3. 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

3.1. Research area

This study would be conducted on cost accounting system of kotebe metal tools factory
located in north east Addis Ababa.

3.2. 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.
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.

3.3. 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.

19
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.

3.4. Sample and sampling techniques

The sample size of the study were 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.

3.5. 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.

20
 Chapter Four
4. 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 refer 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.
Kotebe metal tools factory 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 cost accumulated on the job order cost sheets for completed job are transferred in to
finished goods inventory.

The production departments have five major subdivision 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.

21
 Flow of costs in the factory
Job 1 (WIP)
Direct material
Direct labor Finished Cost of
Factory overhead Job 2 (WIP) Goods Goods sold

Job 3 (WIP)

In the factory direct material direct labor and factory over head costs flow in to working
process for particular job, after that the completed product costs are transferred to
finished goods inventory these finished goods inventory flow to cost of goods sold when
they are sold.
The factory flow of cost the same the theoretical aspects of cost and management
accounting stated.

4.1. Accounting for the major elements of manufacturing

costs
According to the study, kotebe metal tools factory used job order costing
for accumulation and allocation of costs. Naturally the manufacturing
costs that comes direct materials, direct labors and manufacturing
overhead has its nature in this factory. To indicate from which such cost
are incurred.
1. Direct Materials
The direct material costs of this factory consist of the raw materials
used for production of pick axe, sovel, hammer, sickles, steel
sheets, steel bar and steel strip.
According to all respondents replied that the factory is incurred the
huge amount for direct materials purchase. It include the cost of
raw materials insurance, freight in cost and duty on international
shipments.
According to the results obtained form the study materials are
acquired by following the purchasing procedures. Materials request

22
come from different department according to the study. As the
request time if there is no material in store department, the store
department request the materials to purchase by purchasing
requisition. This requisition approved by the head of management
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.
At last receipt of material and sent to the store department. Store
department prepare receiving report which details what items were
actually received and send all primarily documents to accounting
departments. Materials have been received as ordered, the invoice
is approved for payment and the finance department issue a check.

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.
Issuance of materials to the production department according to
the study is made through store issue voucher. Materials are
issued only on presentation of a properly authorized material.
Requisition which showing the type and quantity of materials. A
cost of material requisition is sent to the accounting departments
for recording of costs. If material are returned to the store for any
reason a materials return is not completed and processed in the
same way as the materials requisition.

23
 In the factory studied bin cards are used to assist the store keeper
to control the stock. The bin cards shows the physical movement of
materials with receipts being entered from the goods received not
and issues form the materials requisition note.
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.
When materials are received, the stock ledger for the materials is
debited the balance being computed immediately by moving
average method when materials are sent out to the production
department a credit is made to the stock ledger and the balance is
computed similarly.
The accounting department maintain stock records in quantity and
value for all items of inventory. Goods received notes are posted
immediately by an account from the purchase invoice or payment
vouchers.
The factory inventory taking is made a the end of the physical year
to identify the inventory items that are damage, lost or obsolate.
2. Direct Labor
The person who works 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 albor. Factory
pay monthly payroll to direct laor. 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 any thing
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

24
 job using a special form called labor report. This rport 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
allocated 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 Kotebe metal tools factory
labor costs are computed at each product but not at each cost
center. Each of the type of product has sheet for recording the
daily labors hours worked.
3. Manufacturing overhead.
All costs incurred in the factory (KMTF) 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.
It is not possible to accurately measure the overhead resources
measured by products. Since, the factory (KMTF) cannot trace
specific items of overheads to individual products. Instead KMTF is
estimated the overhead resources consumed. The factory using
labor costs as a basis to allocate the factory overhead.
According to the study, overhead was found that the factory
(KMTF) was established the factory overhead rate for each product
to allocate the overhead costs for each type of products. For
example the stone hammer 2000%, for hing 6 1000%, for speed
harrar 2000%, for pick axe 2kg 2000% for sickles 1000% and

25
 soon. The percent age indicate the allocation of factory overhead
cost to individual jobs.
Indirect cost of a job is computed by multiplying the overhead rate
of each product by labor cost of each product during the given
period.
The well known fact is that the three costs which are indicated
above will determine the profitability of the factory. So, allocating
cost ask much more care and Kotebe Metal Tools, Factory used the
possible method and way of determining unit cost regarding
manufacturing costs.
Accounting treatment for scrap and defective unit

Table 1 the flow of costs in the factory

Years Unit of Quantity Price kg Value
measurement
2009 Number 28,289 0.50 10,144.50
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
benefits 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 Kotebe metal tools factory treated.
According to theoretical aspect the treatment of scrap is identify
scrap with individual jobs and then the value of scrap is with
drawn from the total cost of jobs.
According to the study, there is a defective unit occurred every
years, the quantity vary year to year.

26
 Table 2: Scrap sales of the factory

Types of product Unit of Produce Defectiv By additional cost General

measurem d e Un Modified defectiv
ent product product modifie product e unit
d by %
product
Stone Hammer 6 Number 24,895 95 21 74 0.38%
Hing 6 Number 29,898 104 15 89 0.34%
Spead harrar Number 49,991 89 10 79 0.18%
Spead axe 2kg Number 60,927 136 - 136 0.22%
Sickles Number - - - - -
Sherel Number 34,950 26 19 7 0.08%
Chisel Number 24,995 15 4 11 0.06%
The table indicate annually defective and modified production report of
2010.
The above table indicate that each of the product have a defective unit
expect the sickles. But they are not more according to the produced
products quantity.
The inspector of the KMTF 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 modified and sold
them at a regular prices. The cost of modified units is generally assigned
to factory overhead and the cost of the defective units means not
modified (rework) are assigned to the expense of the factory (KMTF). In
the period incurred.
The factory’s treatment of defective products the same as the theoretical
treatment stated in the cost and management accounting.

27
 4.2. Standard costing
Standard costing is one of the variance that shows the costing system of
an organization whose activities consists 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 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 Kotebe metal tools factory standards are not updated
periodically to reflect changes.

28
4.3. 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.

Table 3 Annually defective and modified

production report of 2010
Types of product Unit Budgeted Actual Variance
measurement
Stone hammer 6kg Number 25000 24,872 128
Hing 6kg Number 27000 26,724 276
Spead harrar Number 48000 47,639 361
Pick axe 2kg Number 61000 60,759 241
Sickles Number 35,500 35,105 398
Shovel Number 36,000 35,924 76
Chisel Number 24,000 23,873 127
This table indicated the budget production variance of the 2011.
The cost manger identify the reason for this variance because it
helps mangers take corrective action that will be incorporated in
future budgets.

29
Based on the study, the factory mainly focus on one type of
variance that is labor efficiency variance. Here the concern is the
causes of this variance. Let us the result of the study, this variance
is rally a usage variance in respect of usage labor time. It is the
difference between the standard labor hour for production and the
actual labor hours worked during the period multiply by the
standard wage rate per hour. Despite this fact there are a number
of factors, which crates this variance, according to the study. For
better understanding look pie chart that shows the results
obtained from the study.

As indicated in the above pie chart, above 50% of the causes of

labor efficiency variance is personal difference, 33% of the causes
is due to failure to maintain machine and 17% which is negligence
of the worker to work.
As the result of the study indicates that most of the labor efficiency
variance is due to personal difference unequal in skill knowledge
and speed to manipulate). Based on the management of the factory

30
 decides so give training and incentive to avoided this labor
efficiency variance.

4.4. 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
Kotebe metal tools factory 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 4 The budget and actual costs of the two

years of the factory
Cost of product Budgeted Actual
2010 2011 2010 2011
Direct material cost 3,164,450 3,070,245 2,830,095 2,885,734.65
Labor cost 161.745 157.511 159.361.60 144.684.18
Factory overhead cost 2,489,700 2,441,410 2,459,932.20 2,430,227.30

Labor cost for 2010 =

31
As show in the above table the budgeted and actual costs are almost
equal. For instance in 2011 the budgeted actual for labor cost is that the
actual costs is 91.2% of the budgeted and in the year 2010, 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.

32
 Chapter Five
5. Summary of findings conclusion and
recommendation
The chapter summarizes the main finds of the study and for wards
recommendations based on the conclusion

5.1 Summary of findings and Conclusion

The study was designed to assess the cost accounting system of the
kotebe metal tools factory. 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 in
formation 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. kotebe metal tools factory uses job
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 kotebe metal tools factory.
Like cost and management accounting profession stated kotebe metal
tools factory has cost flow from work in process up to the finished good

33
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 substatntial part of
the cost of goods manufactured in the factory material purchased by
following purchasing procedure. 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 kotebe metal tools factory 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 employee don’t produce anything by
the case of the factory which pay 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

34
for modified product. This cost incur to sold 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 product 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.

For cost control the kotebe metal tools factory 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.

35
 5.2 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 (kotebe metal tools factory) is not an exception for these facts.
The factory has include most of the cost accounting system and practices
Nevertheless, the researcher needs to recommend the following are.
1. 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.
2. The factory should be given incentive to motivate and training to
develop skills employee at the work place and outside the work
place like seminars, workshops etc.
3. The factory should adjust the treatment of scrap because the
treatment of scrap is not identify scrap 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.

36
 References
1. Cherrington, 1998, cost Accounting a managerial approach 2 nd edition. West
pulishing company, new York.
2. Hornggren C.T. 2003, Cost accounting a managerial emphasis 11th edition USA
person prentice hall.
3. Horngren mark. L, 1986, cost accounting, Har courst Barece Jovanovich,
publisher.
4. Horngren C.T. 199, cost Accounting a managerial emphasis 9 th edition USA
person prentice hall.
5. Buehiman David M. curtin Dennis P. (1998) cost accounting A managerial
emphais, new Jersy, printice Hall.
6. Ronald W. Hilton , Michael W. maher and Fralk H. selto (2000) cost management
strategies for business decision, by MC Graw mill companies.
7. Mosich A 1989 Intermediate Accounting 6th edition USA.

37
 Appendix
Jimma University
College of Business and Economics
Department of Accounting

Interview questionnaires
I Head of the management department
1. Company name
Ownership
Foundation
Location
Size
Capital
Number of employees
2. The management of the factory for what purpose use cost information
3. When there is unfavorable cost, what done the management of kotebe metal tools
factory?
4. Which department have 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
5. How to price established?
 Related to cost production ?
 Related to the situation in the market
 Head of the production department
6. How many sub production department and what are they?

38
7. What are the products of the factory ?

8. From where the production process of the factory start? And complete?

9. When the production department produce the products?

 Every day produce some number of units
 There is customer order
 both
10. Who is report the defective products?
11. Is the production department control the employee to work properly an production
schedule?
Yes  No 
II Head of the purchasing department
1. Name
Position
Qualification
Experience
2. What kind of material purchase of products?
Direct materials  manufacturing overhead 
Direct labor 
3. Is there procedure the production department is follow when need to purchase
material? Yes  No 
4. If yes, what are they ?
5. After purchase the material where they sent ?

6. what are the responsibility of the store department?

7. When the factory taking of inventory?

39
  At the beginning of the fiscal year
 At the end of the fiscal year
8. For what purpose the factory taking of inventory?

III Head of the cost and budget department

1. Name
Position
Qualification
Experience
2. What is the system of recording transaction ?
 Double entry accounting
 Single entry accounting
3. When the fiscal years of the factory ?
 at the beginning of the year
 at the end of the year
4. What kind of costing systems are used to accumulate cost?
 job order costing system
 Process costing system
5. How the factory charge labor cost?
 on hourly rate basis
 in the form of fixed salary
6. How do you allocate overhead in this factory?
Direct labor hours
 Machine hours
Direct labor cost
Other
7. How the organization accounts the spoilage scrap and defective units?

8. When materials are received and issued by store department, the cost department
recorded this kind of transaction? Yes  No 

40
9. Do you have in your organization a standard costing system yes  No
10. if yes what type?
 Basic standard (not up dated)
 Theoretical standard
Other specify
11. What is the benefit of using standard costing?

12. who is responsible to appoint when variance occur?

 Accountants
 Responsibility center managers
Other specify
13. Who is responsible to take remedial action to correct variance?

14. Do you calculate labor efficiency variance? Yes  No

15. If yes what do you think are the main courses of labor efficiency variance?
 Personal difference
 Failure to maintain machinery in proper
 Condition
 Negligence
16. Do the actual cost usually agree to the budgeted cost? Yes  No 

41