NEW MILLENNIUM UNIVERSITY COLLEGE OF

BUSINESS AND ECONOMICS DEPARTMENT OF

ACCOUNTING.

ASSESSMENT OF COST ACCOUNTING PRACTICE (A

CASE STUDY IN MEKELLE FOOD SHARE COMPANY)
A Research proposal submitted to new millennium
university college department of accounting in
partial fulfillment of requirement for Bachelor of
Art (B.A) degree in accounting.
By: Abrehet Haile
ID NO:- ADR/040/07
Under the super vision of Ato Tsegay G/medhin (MSC)
New millennium college Department of Accounting
Mekelle.
April, 2017
Mekelle, Ethiopia
 ACKNOWLEDGEMENT
First and for most great thanks are given to almighty GOD. He has
helped me in every aspect of my life. Next I greatly appreciate my advisor
Ato tsegay g/medhin(MSC), for his through reading of the paper,
valuable comments, suggestion and his kind full appreciation. I would
like to thanks new millennium university 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.

ABSTRACT

I
The study “Assessment of cost accounting practice” was conducted on
mekelle Food Share Company. The main objective of the study is to
assess the product costing system of the factory. To achieve this
objective, both primer, and secondary data sources were used. Primary
data were obtained using in-depth interview where as secondary data
were obtained from annuals, records and financial statements of the
factory. The result of the data analysis showed that. The company uses
both process costing and job order costing system. The basic Problem of
the company is price differentiation that used to produce the same
product.

II
 TABLE OF CONTENTS
Title Page
 Acknowledgement..................................................................I
 Abstract................................................................................II
 Table of content....................................................................III
Chapter One
1, Introduction .............................................................................1
1.1, Background to the study .....................................................1
1.2, Statement of the Problem......................................................2
1.3, Objective of the study...........................................................3
1.4, Research Methodology..........................................................3
1.4.1, Methods of data collection ............................................3
1.4.2, Methods of data analysis ..............................................4
1.5, Significance of the study.......................................................4
1.6, Scope of the study ...............................................................5
1.7, Organization of the paper ....................................................5
Chapter Two
2, Related Literature Review .........................................................6
2.1, What is cost accounting .......................................................6
2.2 Classification of cost .............................................................6
2.2.1 Cost relation to the production ........................................7
2.2.2. Cost in their relation to manufacturing department.........8
2.3 Use of cost information..........................................................9
2.3.1 Cost for planning and control .........................................9
2.3.2 Cost for analytical purpose.............................................10
2.4 Costing system ....................................................................10
2.4.1 Job order costing system ...............................................10
2.4.2 Process costing system ..................................................10
2.5 Financial reporting .............................................................13

III
Chapter Three
3. Data, presentation, Analysis and interpretation ......................15
3.1 Introduction ........................................................................15
3.2 Background of the organization .........................................15
3.3 Products ...........................................................................17
3.4 Direct and indirect cots of the company ............................17
3.5 Allocation of production cost ...............................................19
3.5.1 Direct material cost allocation ......................................19
3.5.2 Direct labour costing allocation ....................................19
3.5.3 Factory overhead cost allocation ...................................19
3.6 Cost statement ...................................................................20
3.7 Product costing system of the company...............................22
3.8 Cost centers ........................................................................23
3.9 Purpose of product costing for the company........................26
3.10 Cost data for decision making ..........................................27
3.11 Roles, responsibilities and accountability of cost accountant in
mekelle food share company...............................................27
3.12 Techniques used to the company to reduce cost ...............29
Chapter Four
4. Conclusion and Recommendations ........................................30
4.1 Conclusion ........................................................................30
4.2 Recommendation ...............................................................32
 Reference.........................................................................33
 Appendix ........................................................................34

IV
 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In to day’s proper costing system is a very important tool for the success of
any organization as well as personal financial manager.

An essential system of costing is an essential factor industrial under modern

conditions of business and such may be regarded as an important part in the
efforts of any management to serve business stability In this study, attention
is given to the costing practice of manufacturing company. Manufacturing
means the process of converting materials in to finished goods by using raw
materials, labour, overhead cost and many types costs used in converting the
raw materials in to products to be sold to customers.

Thus cost accounting provides information for both management and

financial accounting. It measures and reports financial and non-financial
information that relates to the past of acquiring or consuming resources by
the organization. Any organization starting from sole proprietorship to the
corporation acquire or know how and use of cost concept and practice.
Because cost accounting provides key data to mangers for planning,
controlling, and evaluating decision making, fixing product price as well as to
know service price. Cost mangers must use method of allocation because, we
can not observe causal link between this resources spending and use. To this
end, this project will evaluate the cost accounting practice of mekelle food
Share Company.

1
 1.2 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.
This research tries to address the following questions and gives some clue as
to how to solve the mentioned questions.
 What type of cost accounting method is used by the company?

 How does the company allocate cost to cost object?

 How is the cost accounting information contribute for management

decision making?

 Is there proper keeping and recording of cost data?

 Does the company have skilled human resources that work on cost
accounting?

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1.3 OBJECTIVE OF THE STUDY
1.3.1, General Objective

The general objectives of this study is to asses the cost accounting practice of
mekelle food share company.
1.3.2, Specific Objective
 To see the recording practice and how the cost records are maintained.

 To ascertain the cost allocation practice of the company

 To evaluate the company effort to use cost accounting information for

management decision.

 To produce appropriate recommendations to improve the company cost

accounting practices.

1.4 RESEARCH METHODOLOGY

1.4.1 METHODS OF DATA COLLECTION
To understand the study, the researcher would use primary and secondary
data collection tools. The primary data would be collected from primary
source, unstructured in-depth interview to the finance manger, cost a
division, planning and human resources.
The secondary data were obtained from different manuals, document and
related reports by reviewing the organization financial statements, policies,
procedure and administrative department of the organization
1.4.2 METHOD OF DATA ANALYSIS
The collected data would be processed, analyzed and interpreted to report the
result of researcher finding of the selected company. The data analysis begin
by editing and classifying the collected data in more meaningful 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

3
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 understand by
any concerned body. Finally narrative sentences would be used to present the
study report and where necessary table would be supported by descriptive
way of data analysis by comparing actual finding with theory in conducting
the study.
1.5 SIGNIFICANCE OF THE STUDY
This research paper has the following importance. First, the out put of the
study will help the factory to correct its problems. Second, in doing the
research, the student researcher will develop research skills and finally, the
research paper can be used as base for further research.
1.6 SCOPE OF THE STUDY
The study would cover as much as possible all cost accounting practice which
is focused on mekelle food Share Company. 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 asses the cost department of the
company. And finally recommendation were for 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 limitation to complete the project
 Difficult to inspect un aspects of the company
 Some staff members were willing to give the required information
because of carelessness or intentional failure.

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

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 1.8 ORGANIZATION OF THE PAPER

The study have four separate chapters. The first chapter is an introduction
part includes, background of the study, statement of the problems, objectives
of the study, significant of the study, scope and limitation of the study.
Second chapter present important related literature review, chapter three is
about data presentation, analysis and interpretation and finally, the last
chapter four, present summary, conclusion and recommendation.

5
 CHAPTER TWO
LITERATURE REVIEW
2.1 What is cost Accounting?
Cost accounting is the process of 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 primarily to manufacturing.
Organization that combine and process raw material in to finished products.
Management accounting is the process of identification measurement,
accumulation, analysis, preparation, interpretation, and communication of
financial information used by managements of plane, evaluate, and control
with in an organization to assure appropriate use of and accountability for its
resources (Cherrington, 1998, p 5).

Cost accounting provides information for management accounting and

financial accounting management accounting measures and reports about
financial and non financial information that helps managers make decisions
to fulfill the goal of the organization and financial accounting focus on
reporting to external parties. (Horngren, 2003, p2-3)
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 operation (Cherrington, 1998,p54).
2.2 Classification of costs
Classification are needed for development of cost data that are useful
management with regard to the following five purposes or aims these are
1. Planning profit by means of budget.
2. Controlling cost via responsibility accounting
3. Measuring annual or periodic profit including inventory costing
4. Assisting in establishing selling price and pricing policy

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5. Furnishing relevant cost data for analytical processes for decision making.
There for cost are classified in to broad category and some of them are listed
below.
2.2.1 Cost in their relation to the production.
The elements of manufacturing cost are direct material. direct labour, and
factory overhead (indirect manufacturing). Direct material and direct labour
costs are combined in to an other classification called primary cost, and
direct labour and factory over head can be combined in to a classified called
conversion cost. Representing the cost of converting direct material in to
finished products (Frigo, 1986, p 10).
Direct material are all materials that forms and integral part of finished
product and that can be included directly in calculating the cost of product
clued all to make automobile bodies. The case and feasibility with which the
material item can be traced to the final product are major consideration in
their designation as direct material. Give and facts to build furniture from
part of the finished product but for costing purposes such item may be
classified as in direct materials for manufacturing cost (Frigo 1986 p 10).
Direct labour: is labour applied directly to the materials. Comprising the
finished product. The cost of wedge paid to skilled or unskilled workers and
assignable to the particular unit produced is termed direct labour (Frigo,
1986, p10).
Factory over head:- Defined as the cost of indirect material, indirect labour
and all other manufacturing cost that can not conveniently by charged to
specific unit, job or products (Frigo, 1986, 10-11) Indirect materials are those
needed for the competition of the product but whose consumption with regard
to the product is either so small or so complex that is would be futile to treat
them as direct material.
Indirect labour:- may be defined in contrast to direct labour as that labour
which does not directly affect the constitution or the composition of the
finished product. The term include the labour cost of supervisor shop clerks,

7
general helper cleaner and those employees engaged on maintenance work or
other service work. Not directly related to production (Cherrington, 1998,
p28).
2.2.2 Cost in their relation to manufacturing department
Factory is generally organized along departmental lines for production
purpose .This factory department allization is the basis for the important
classification and subsequent accumulation of cost by departments. Products
and service department .
Product department :- is one in which manual and machine operation is
performed directly upon any part of product manufactured , more specifically
, producing department are those whose cost may be charged to the product
because they have contributed directly to its production . weather two or
more different type of machine perform operation on product with in the
same department a break down into cost center increase the accuracy of
product cost (cherrington,1998,p.492).
Service department:- one that is not directly engaged in production but
tenders a particular type of service for the benefit of others department . in
some instance these service benefit of others service department as well as
producing department represents a part of the total factory over head and
must be observed the cost of the product by means of the factory over head
cost ( cherrington , 1996 pp,492-93).
2.3 Use of cost information
2.3.1 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 up coming period. A budget that covers financial aspects quantities

8
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.
Advantages of budget
Budgets are big part of most management control style (System) Some
advantages are listed below,
1. Compares strategic planning and implementation of plane

2. Provided a framework for judging performance.

3. Motivates mangers and employees

4. Promotes coordination and communication among sub units with in

the company (Horngren, 2003 pp, 176-177).

Standard cost:- Closely allied with the budget are standard cost which are
predetermined cost for direct material, direct labour, 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, p97).
2.3.2. Cost for analytical purpose
Different type of involve varying kind of consideration in managerial analysis
for decision making for example different analysis for decision making.
2.4 Costing system
The two basic type of costing systems are used to assign cost to product or
service. Which of them are as follow.
2.4.1 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

9
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).
Examples of business that use job order costing includes
 Construction system

 Furniture manufactures

 Printing firms

 Repair shops,

 Service giving organization

 Garages, etc

2.4.2 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 unites produced for general
sale and not for any specific customers. Average cost over large number of
nearly identical product companies that use process costing system are as
follow Cherrinqton, 1998 p 278).
 Cement factories

 Petroleum refineries

 Flour companies

 Beer factories

 Textile factories

 Beverage companies

 Characteristics of process costing system (Cherrination, 1998, p314).

10
  The products manufactured are homogenous

 The cost are accumulated in departments or cost centers

 Each unit produced will receive the same amount of direct material,
direct labour, and MOH cost.

 Average Unit cost is obtained by dividing total cost to unit produced in

a given department (cost center)

 Costs are divided in to two based on when the costs are incurred in to
the production process.

1. Direct material cost:- This cost is usually added at one times either at
the beginning, at the middle or at the end of the production process.

2. Conversion cost (Direct labour (MOH cost) there costs are usually
added evenly or uniformly through out the production process.

2.5 The difference between job order costing and process costing system. In table format.

JOB COSTING PROCESS COSTING

1 Types of product Diversified product line in Homogenous products

which products are produced continuously
produced in batches with
each batch representing a
unique product

2 Cost accumulation By job for a specified By department or cost

number of unit center for a specified
period of time

3 Cost per unit costs accumulated by job Cost accumulated by

dividing when job is cost center divided by
complete equivalent units of

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 production during a
period of time

4 Reporting By job By cost center or

department

Source: (Cherington, 1998, p 278).

Financial reporting

In order to prepare financial statement for manufacturing company

(Production Company) the following schedules should be prepared in
advance.

Schedule Cost of Direct materials

Beginning direct material inventory…………….xx
Purchase in the month …………………………….xx
Direct material available in the month………… xx
Ending direct material inventory ……………….( xx)
Direct material cost used ………………………….xx
Schedule 2 Cost of good manufactured
Direct material used cost …………………………. xx
Direct labour cost…………………………………… xx
Manufacturing over head cost ……………………xx
Cost incurred in current period…………………..xx
(+) work in process beginning …………………… xx
Total cost incurred to date ……………………… xx
(-) work in process ending
Cost of good manufactured ……………………xx
Schedule 3 Cost of good sold
Finished good beginning ……………………………xx
Cost of good manufactured………………………. xx
Cost of good available for sale ………………….…xx
(-) Finished good ending ……………….…….……(xx)
Cost of good sold………………………………….. xx

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Schedule 4 Income statement
Revenues ……………………………………………... xx
Cost of good sold ……………………………………. xx
Gross profit ………………………………………….. xx
Operating expense …………………………………. xx
Operating Income ………………………………….. xx

19XX COMPANY
BALANCE SHEET
DECEMBER 31 ….XX

Asset
Current Asset Liability
Cash ……………………………. Account payable
Account receivable……………. Wage payable
Inventory Payroll tax payable
Raw material…………………… Total current liability
Work in process………………… Long term dept.
Finished goods……………….. Mortgage …….… xx
Total current asset…………. Bond payable …xx
Fixed asset………………….. Total liability…… xx
Progress plant & equipment Owner equity
Total asset …………$xx Common stock ……xx
Retained earning …. Xx
Total owner equity ..xx
Total Liability and owners equity…xx

Source: (Cherington, 1998, p 278).

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 CHAPTER THREE

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

3.1 INTRODUCTION
As per the schedule out lined in the first chapter, this part consists of the
responses of respondents, presentation of data obtained form 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 interpret on that data.
3.2 BACKGROUND OF THE ORGANIZATION
mekelle food share company was established in 1938. It occupies a
pioneering status signaling a break through in the on set of industrialization
in Ethiopia. Over the last seven decade of its existence, this giant industry
had been consistently running a wealth of experience industrial production
and marketing mix of food products. The present mekelle food share company
has grown into far reaching reputation. For mounting quality test of its
product among the consumer all over the country. mekelle food share
company located at the heart of mekelle situated 17km from metropolitan
Addis Ababa along the artery motor ways stretched through the resort of
romanat. Currently the factory runs seven production lines with annual
production capacity of 921, 625 Kilograms of different food products and the
factory mange's a total of 520 employee labor.

14
Table 3.1 Number of staff

Description Male Female Total

Total employee 350 170 520

Permanent 316 153 469

Temporary 34 17 51

Source: mekelle food share company HRM department.

Table 3.2 The number of productive and supportive employees

Description Number of Percentage

employee

Productive 313 60%

Supportive 207 40%

Total 520 100%

Source: mekelle food share company HRM department.

The working forces are composed of professionals and non professionals. The
professionals are, engineers, mechanics, administrators, and accountants
and so on ranging from first degree to second degree.
The company purchase the raw materials form government agricultural
organization, private agricultural organization and other industries.

mekelle food share company has five major departments and one service
namely; finance, commercial, production and technique, human resource
development and administration audit department and production, and

15
service quality improvement and assurance service. Four o f the departments
and the services are directly responsible to the general manger as it can be
observed from the organizational structure audit department is responsible to
audit committee which turn responsible to the privatization and public
enterprise supervising agency. The general manger is responsible to the
board of directors which is responsible to the privatization and public
enterprise supervising agency.
3.3. Products
Products are the out puts which are manufactured goods of the factory,
primarily, any manufacturing enterprise in least developed countries has the
satisfying domestic demand on a particular product. This helps to reduce or
avoid the import of consumption goods from abroad.
On account of this fact, the mekelle food share company attempts to achieve
the primary objective of satisfying the society demand by producing a Varity
of products. The main products of this company are varies grades of wheat
flour, bread, sweet biscuits, high energy biscuits, varied types of spaghetti
(long pasta), varied types of macaroni, and positing, on the other hand the
company also supplies industrial by products derived form wheat flour in the
form of animal feeds (interview with the head manager)
3.4 direct and indirect cost of the company
Like other manufacturing company, mekelle food share company have direct
and indirect cost associated to the product. Direct cost 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:
Direct material cost are costs that the company uses to produce finished
products. These are wheat, barley, Sourgum, Marmarata, Collupuline powder
in each cost center are directly to the cost of that product.
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.

16
Indirect costs: indirect cost of a cost objects are costs that are related to the
cost object but that can not be traced to it in an economically feasible way
incurred in the practices of manufacturing a product and are not charged as
direct material or direct labour costs a particular cost centers. Such costs are
in direct labour cost, indirect materials cost, depreciation, electricity and
water, repair and maintenance, fuel, stationary, insurance and others.
The direct and indirect costs of a cost object are related to particular cost
objects. These costs are direct labour costs that are categorized
departmentally during payroll preparation and hence the costs are easily
traceable. Direct and indirect materials consumption are distributed across
the cost centers using the annual production quantity by each product line.
These is because that finished out put have direct relation with the materials
used for their production and indirect labours are also departmentalized
using annual production quantity considering that the application of labour
and emphasis to the particular cost center will vary with out put fluctuation.
Selling and distribution expense are assumed to be incured for promoting
and distributing sales. These direct and indirect costs are used in
manufacturing company. In the case of mekelle food share company also this
types of costs are there.
3.5 ALLOCATION OF PRODUCTION COSTS
3.5.1. 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 shall indicate cost centers together with the
type of product to be produced with the material. Monthly totals of material
consumption register must agree with that of the general account registers.

3.5.2 DIRECT LABOUR COST ALLOCATION

17
It is the cost of human endeavor. Then payrolls shall workers in each
production unit which can be categorized as direct labour where as indirect
labour workers and administrative workers accumulated in the respective
production unit each accumulated monthly. Direct labour cost shall be
distributed to products as per quantities produced.
3.5.3 FACTORY OVER HEADS COST ALLOCATION
The factory also use actual over head rate which is the rate at which overhead
cost are actually incurred during an accounting period. Cost allocation base
that should be used when allocating the indirect cost pools at mekelle food
share company must be appropriate cost allocation base.
APOHR= AOH Cost for the accounting period where: Actual product
Actual amount of the cost driver APOHR= overhead
3.6. COST STATEMENT
mekelle food share company prepares cost of good manufacturing statements
monthly, then the total amount for the year is added for the preparation of
financial statements i.e income statements. It is this measurements 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 bellow (source;
observation from annual cost reports).

18
 MEKELLE FOOD SHARE COMPANY

INCOME STATEMENTS
FOR THE YEAR ENDED SENE 30, 2002

Sales ……………………………………………………… Birr. 92,888,330.60

Less: cost of good sold ……………………………………….(81,068,645.28)
Gross operating surplus………………………………….Birr 11,819,685.32
Other Income …………………………………………………….. 551,156.96
Total income………………………………………………..Birr 12,370,842.28
Expenses
Selling and distribution expense ……………………………. 1,958,50079
General and admis exp…………………………………………. 6,443.311.67
Audit fee…………………………………………………………………....12,000
Bank Interest…………………………………………………….... 146,401.13
Board and audit committee fee…………………………………. 71.375.00
Total expense……………………………………………………..8,631.588.59
Net surplus before tax …………………………………………3,739,253.69
Provision for taxation ………………………………………...(1,121,776.11)
Net Profit After tax …………………………………………..…2,617,477.58
Transfer to legal reserve ……………………………………… (130,873.88)
Net profit after legal reserve ………………………………… 2,486,603.70
Balance brought forward…………. -------
Prior year adjustment ……………………………… -------
Proposed Dividend ……………………………………..2,486,603.70 Birr.

19
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 manger and their 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 Kaliti food share
company is reality to take about accurate cost information form current
costing practice.
3.7 Product Costing System of the Company
According to current information, mekelle food share company use both
process costing system and job order costing system. The company use job
order costing system for some of its products that are manufactured in
identical lots of groups or that are produced according to customer order
specification. The out puts of the company are heterogeneous and hence,
mangers need a costing system that accumulates costs by job or customer or
client and distinct unit is determinate for each job completed. Products that
follow job-order costing systems are high-energy biscuits, sweet biscuits and
bread production line departments.
There is a subdivision under commercial department responsible to apply the
rules and regulation that has been set by finance department and approved
by top management.
UC= TC accumulated for the job Where UC= Unit cost
Number of units manufactured in that job TC= Total cost

20
For example at the time of producing sweet biscuits, there are costs such as
direct material cost, direct labour cost and factory overhead cost. To get the
unit cost of a sweet biscuit divide the total cost by the number of sweet
biscuit produced. That total cost of the sweet biscuit is the sum of direct
material cost, direct labour cost and also of selling and administrative over
head.
The company also uses process costing for products that are produced in
mass production of the like units which usually pass in continuous flow
through a series of uniform production stage called process or operations.
The basic approach to this costing system is to accumulate costs in a
particular operation or processing department for the entire and then divided
the total accumulated cost by the total number of units completed during the
period to determine the unit cost of the product .
UC = 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.
3.8 Cost Centers
According to the interview held with the finance manger components of
product costing are discussed below.
mekelle food share company designed its cost centers in three main
departments based on the function and operation of the machineries, the type
of products. The activities of the department engaged in products identified
based on these cost structure and pricing derivate after accumulating the
prime cost under each cost centers.
These production cost centers are wheat flour line department, spaghetti
(long pasta) line department and various type of Macaroni line departments.
These product costing systems of the factory employee several
manufacturing accounts. As production take place, all manufacturing costs
are added to the work in process inventory. As soon as products are

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completed their product costs are transferred from work in process inventory
to finished good inventory during the time period when products are sold.
The product cost of inventory sold is removed from finished goods and added
to cost of goods sold which is an expense of the period in which the sale
occurred. Cost of good sold is closed in to the income summary account at
the end of the accounting period. In process costing, labour, material and
overhead costs offer are incurred at different rates in production process.
Direct material is usually placed in to production at one or more discrete
points in the process. In contrast, direct labour and manufacturing overhead,
called conversion costs, and usually are incurred continuously through out
the process when an accounting period ends, the partially completed with
respect to material and conversion activity.
How do you calculate equivalent unit of work in process. In process costing,
you would compute the production cost per equivalent unit of production
department or process by dividing production cost by equivalent unit of
production. Then this type of costing system is the company, and the
valuation method is FIFO method.
Cost per equivalent units = Production cost
Equivalent unit
Are there any By Products with main product? Yes, the factory also supplies
industrial By Products drived from wheat flour in the form of animal feeds.
(Source: Interview with the finance manager)
How is the cost of by products and scrap material treated?
The cost of By Product accounting methods are normally known. These are
production method and sales method. The production method recognized the
By Product at the time of production. The sales method delays recognition of
By Product until the time of sale.
However, the former method is assumed to be correct By Product recognition
at time of production.
Work in process ……………………xxx

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 Raw materials…………………………….xxx
This is to record direct material purchased and used in production.
By product inventory …………………………xxx
To record cost of
Finished goods………………………………….xxx
Finished good and By
Work process ………………………………….xxx Products completed
To record cost of good completed at the time of sale
Cost of good sold …………………….xxx
To record the cost of
Finished good …………………………………..xxx Main products
Cash/A/R………………………………………….………….…xxx
Sales …………………………………..……xxx
Generally both method for by product recognition violate the general
accepted accounting principle. (GAAP). The company use by product
recognition at the time of sales because these technical violations are
permissible because the dollar amount of the By Products are 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 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. Then the company use directly this type of
costing system for the treatment of allocation of the cost. (Source: Interview
with the finance manger).
3.9 Purpose of product costing for the company
mekelle food Share Company use product costing for three purposes.
According to the respondents costing has three purposes mainly at mekelle
food Share Company. Each of them are listed below.
1. For financial statement: reporting papoose mekelle food share
company product costing is also used for purpose financial statements.
Its importance is to prepare a schedule of cost of good manufactured a
schedule of cost of good sold, and an income statement.

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 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 mekelle
food share company is cost plus pricing approach. 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 manger of this factory must relay on a quick and straight
forward method for selling price. As a good starting point
,product cost give 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.
3. 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
manger).
3.10 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.
Selling prices of manufactured goods in mekelle food share company 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 manger).

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3.11 ROLES, RESPONSIBILITIES AND ACCOUNTABILITIES OF COST
ACCOUNTANT IN KALITI FOOD SHARE COMPANY.
Roles of Cost Accountant: Cost accountants plays an important roles in
mekelle food share company. 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 annual inventory of finished goods
and fixed assets.
- 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 year end
adjustments.
 To follow up tax for payments
 To prepare corporate budget of the company.
 To compute manufacturing costs each year.
Accountabilities of cost accountant

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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
3.12. Techniques used to the company to reduce cost
Currently, the company is incurring a large amount of costs but still
maintaining the quality of products produced. By now, the company is to
design methods of reducing its production cost using the following
techniques.
 Replacing the old truck with the new ones so that timely maintenance
cost is highly reduced.
 Comparison of its suppliers as free market is granted by the existing
government.
 Encouraging the domestic suppliers of raw materials so that in puts
can be purchased with mach lower price than the imported once.
(Source: Interview with the quality control personnel)

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 CHAPTER FOUR
CONCLUSION AND RECOMMENDATIONS

4.1 Conclusion
The main objective of the study is to assess the cost accounting practice of
mekelle food share company. For the study purpose the research have
collected and used primary and secondary data. The secondary data were
collected and analyzed from the financial documents of the company.
The primary data were collected from interview held with the finance manager
and cost accountant workers selected by judgment sampling method. In
addition to these, discussion have been held with division head of cost
centers. Then the conclusions reached are the following.
 The current costing practice of product costing purpose components in
each purpose, product costing system, cost center allocation, and cost
allocation base are found at good level. However there are certain
issues that should be examined by the finance department.
 The company uses cost for their product pricing purpose and for
preparation of their financial statements. It uses cost plus pricing
approach to price their product by computing the material cost. Labor
cost, overhead cost and administrative expenses and to this adds up
the desired profit percentage. This pricing approach used to fix the
desired profit percentage of the company. The preparation of financial
statement also used to know its net income and net loss.
 Basically, the company uses both process costing and job order costing
system. Costing system for products that are produced in mass
production which usually pass in continuous fashion are process
costing system. These costing systems accumulate costs in a particular
costing center.
The company use job order costing system for some of its products that
are manufactured in identical lots of groups or that are produced

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 according to customer order specifications. In job order, cost is
accumulated in which it occurred.
The use of both of these costing systems helps the company for its
different products to accumulate costs that used for different purpose
based on their nature of production. This is used to control the company’s
flow of production costs easily.
mekelle food share company is faced with problems that affect product
costing. These are old age machines but now a day’s almost all are
planned to be replaced by new machines which takes less time to produce
products, and avoid frequent break down.
Generally mekelle Food Share Company costing practice concluded as it
used appropriate cost allocation base, use the product costing system
based on the type of products and their process of production. The
company product costing practice is good that makes if possible business
operation and now a days is growing by increasing the type of products it
produces and producing in large volume.
4.2 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, I would like to for ward some recommendations on
the mekelle food share company costing practices. The basic problem of this
company is price differentiation that used to produce the same products. This
comes form 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 suppler.

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Finally we perceived 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 are not qualified as their position require, even though they acquired
the position by long experience. As a result poor labor productivity will occur
which in turn affect cost. Therefore the company has to plan to replace
employees in the long run.

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 REFERENCES

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

Edition. West publishing company, new York.

2. Horngren C.T. 2003,Cost Accounting a Managerial Emphasis 11th

Ed. USA person prentice hall.

3. Frigo mark. L, 1986, cost accounting, Har Court Barece

Jovanovich, publisher.

4. Horngren C.T, 1991, Cost accounting, a managerial emphasis 9th

ed U.S.A, Person prentc hall.

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

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

7. Cheringtion, Hubard E.Dee, Luthy David H. Jowen, 1998, Cost

Accounting Managerial Approach.

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

Hill.

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 NEW MILLENNIUM UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING
A. To cost Accounting
Personal information
Age: ______________
Sex ______________
Education: ________
Experience ________
1. What is the accounting system of recording transaction in your company?
2. What are the main products your company manufactures?
3. What are the main raw materials used to manufacture the product?
4. From where do you purchase raw materials?
5. What is the composition of your human resource labor force?
6. How you charge the labor costs?
7. What are the costs that you treat as manufacturing over head cost?
8. How are raw material labor and manufacturing over head costs are
recorded?
9. How do you classify production costs?
10. Is your costing system is computerized?
11. Which costing system is applied in accumulating cost?
12. How many cost centers are there?
13. Do you accumulate production costs in each cost centers?
14. How do you evaluate cost of work in process of each cost centers?
15. How do you calculate equivalent unit of work in process?
16. Which valuation method do you use for work in process (FIFO OR WA?)
17. Are there any by products with main product.
18. How is the cost of by products and scrap material treated?
19. In what frequency do you prepare cost of production report in each cost
center?

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20. For what kind of decision do you use this report?
B. To management bodies
1. For what purpose do you need cost information?
2. In what frequency do you request cost information?
3. How do you make pricing decision?
4. What strategy do you follow to reduce cost of production?
5. Any other information you can give me that are important?
1.Support small and medium scale manufacturing enterprise in order to
supply the necessary raw material from them .by doing so tray to minimize its
cost of purchasing raw material from outside of the country and other related
costs such as transportation and insurance cost.

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