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Assessment of Cost Accounting System
Assessment of Cost Accounting System
PRACTICE
(A CASE STUDY ON KALITI FOOD
SHARE COMPANY)
Jimma University
College of Business and
Economics
Department of Accounting
May, 2011
Jimma,
Ethiopia
2
ACKNOWLEDGEMENT
First and for most great thanks are given to alimighty Allah. He has
helped me in every aspect of my life. Next I greatly appreciate my advisor
Ato Deresse Mersha, 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 least
but not the last, my thanks go to W/ro Yimegnusahl Tadesse who she
helped me in secretarial service.
I
ABSTRACT
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 Limitation of the study ..........................................................5
1.8 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
Kaliti 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
1. INTRODUCTION
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?
Does the company have skilled human resources that work on cost
accounting?
2
1.3 OBJECTIVE OF THE STUDY
General Objective
The general objectives of this study is to asses the cost accounting practice of
Kaliti food share company.
Specific Objective
To see the recording practice and how the cost records are maintained.
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
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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
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.
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.
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1.6 SCOPE OF THE STUDY
The study would cover as much as possible all cost accounting practice which
is focused on Kaliti 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.
Time and financial constraint to go every day and collected the data in
detail.
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.
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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).
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3. Measuring annual or periodic profit including inventory costing
4. Assisting in establishing selling price and pricing policy
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).
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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,
general helper cleaner and those employees engaged on maintenance work or
other service work. Not directly related to production (Cherrington, 1998,
p28).
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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.
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
Standard cost:- Closely allied with the budget are standard cost which are
predetermined cost for direct material, direct labour, and factory over
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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).
Furniture manufactures
Printing firms
Repair shops,
Garages, etc
10
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
Each unit produced will receive the same amount of direct material,
direct labour, and MOH cost.
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.
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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.
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2.5 Financial reporting
19XX COMPANY
BALANCE SHEET
DECEMBER 31 ….XX
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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
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CHAPTER THREE
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.
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Table 3.1 Number of staff
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.
Kaliti 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
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
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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 Kalit 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, Kalit 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.
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
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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.
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
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type of product to be produced with the material. Monthly totals of material
consumption register must agree with that of the general account registers.
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 Kaliti 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
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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).
20
KALITI FOOD SHARE COMPANY
INCOME STATEMENTS
FOR THE YEAR ENDED SENE 30, 2002
21
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.
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UC= TC accumulated for the job Where UC= Unit cost
Number of units manufactured in that job TC= Total cost
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.
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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
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.
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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)
25
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).
Kaliti food Share Company use product costing for three purposes. According
to the respondents costing has three purposes mainly at Kaliti food Share
Company. Each of them are listed below.
1. For financial statement: reporting papoose Kaliti 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.
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 Kalliti
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.
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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).
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 Kaliti 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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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).
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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
4. CONCLUSION AND RECOMMENDATIONS
4.1 Conclusion
The main objective of the study is to assess the cost accounting practice of
Kaliti 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.
30
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 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.
Kaliti food share company is faced with problems that affect product
costing. These are old age machines but now adays almost all are planned
to be replaced by new machines which takes less time to produce
products, and avoid frequent break down.
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4.2 RECOMMENDATION
32
REFERENCES
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JIMMA 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 manufactured 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 cost that you treat as manufacturing over head cost?
8. How are raw material labor and manufacturing over head cost?
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 co 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?
20. For what kind of decision do you use this report?
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B. To management bodies
35