ABSTRACT

This research paper is prepared to assess the cost Accounting system of

Ethiopia plastic share company. Proper use of cost accounting principles
enable the business to be successful in planning and controlling of their
operations as well as capable of costing of product and services properly.

The objective of the study is to assess whether the organization under

consideration is using cost accounting systems in its management in
accordance with the standards and theories of cost accounting and to
investigate an over view of cost accounting practices. To reach this
objective, data were collected from the factory. Here, for primary data, the
researcher used interview and for secondary sources of data collection
records and other documents related to cost were used.

The result and discussion port of this research was analyzed based on the
data collected through interview with some supporting documentary
evidences such as the past years cost data. Based on this, the study
intended to suggest possible solution to the problem identified.

The study is expected to mare manufacturing companies aware of the

importance of including cost accounting system in their operations for
manufacturing purpose.

ACKNOWLEDGMENT

First of all I would like to thank Almighty God and Merry for their help in
doing this research paper.

I would like to express my deepest gratitude to Ato Derese Mersha for his
advice, guide and professional support in developing the research paper.

My special gratitude also goes to W/ro Tiguaded Tegegne who has done the
tedious typing and correction of this paper.

Finally, I would like to thank all the members of the Jimma University
Library staff for their endurance in searching for materials requested and
prevision of these materials write developing the paper.

Table of Contents
Contents

Page

No
Abstract..................................................................................................I
Acknowledgements..................................................................................II
Table of Content......................................................................................III

CHAPTER ONE
1. Introduction........................................................................................1
1.1 Background of the study.............................................................1
1.2 Statement of the problem............................................................2
1.3 Objective of the study..................................................................3
1.4 Research Design and methodology..............................................4
1.5 Scope of study............................................................................5
1.6 Significance of the study.............................................................6
1.7 Limitation of the Study...............................................................7
1.8 Organization of the Study...........................................................8
CHAPTER TWO
3

2. Literature Review
2.1 Definition of Cost and accounting...............................................9
2.2 Classification of Costs.................................................................9
2.3 Elements of product Costs..........................................................11
2.4 Non Manufacturing Costs...........................................................12
2.5 Costing Methods.........................................................................13
2.6 Cost Recording and Cost Accumulation procedures....................17
2.7 Use of cost information...............................................................20
2.7 Scrap Spoilage and Defective Goods............................................20
2.8 Cost of Production Report...........................................................22
2.9 Cost accumulation, assignment allocation..................................23
2.10 Cost of production report.............................................................24
2.11 Pricing models.............................................................................25
CHAPTER THREE
3. Research and Design .........................................................................26
3.1 Background of the Company.......................................................26
3.2 Classification of costs.................................................................27
3.3 Cost accumulation at Ethiopia plastic share company................30
3.4 Manufacturing overhead costs....................................................36
3.5 Cost accounting for scrap...........................................................36
3.6 Cost of product for setting selling price.......................................37
3.7 Standard Costing........................................................................39

CHAPTER FOUR
4. Summary of finding conclusion and Recommendation........................40
4.1 Summary of findings and conclusion..........................................40

4.2 General Recommendation...........................................................41

Reference.............................................................................................43
Questionnaires....................................................................................44

CHAPTER ONE
1. INTRODUCTION

Back Ground of the Study

The historical investigation of the development of cost accounting in uk,
until fairly recently has paid a great deal of attention to the period to
1990. Much academic strategy and archival research has been an
influence for development of costing system.

Costing system during the latter part of the 19 th century has been
examined in some depth. For example Boyan and Edward, 1974
concluded from their studies of coal, iron and steel company records
from that period there was much sophistication in costing practices,
the allocation of over heads and the integration of cost and financial
accounts.
It any organization cost accounting is a centre of attention it is a vita;
tool in the management of the internal affairs of the organization. This
involves managers examing past performance and systematically
exploring alternative ways to make better informed decisions in the
future.
It measures and reports financial and non financial statement
information that relates of financial and non financial statement
information that relates to the post of acquiring or a consuming
resource by an organization. Any organization starting from the
smallest sole proprietorship to the largest corporation acquiring know
how and use cost accounting concept and practice. Because cost
accounting provides key data to manager for planning. Controlling.
Evaluating dccian making fixing product price as well as to know for
vice price.

The research paper evaluates the process costing & pricing practice and
also provides information like product cost, process cost. Service utility
and other necessary information of Ethiopia plastic share company.

1.2 Background of the Factory

It is undoubtedly clear that the competitive market situation prevailing

in the country id determining in demanding thoughtful moves in many
sectors of the economy. Among many areas plastic factories are face
with the problem of stiff competition among indigenous as well as
foreign producers (world market).
In such circumstances paper management of costs is crucial for the
success of business or failures of business. Some costs will vary with
volume while others remain constant for a current and certain level of
activity.

The

purpose

of

cost

accounting can

be

generally

be

distinguished between the product costing purpose of a system and

other purposes such as planning and control. The cost of production
system ascertains the cost of product and services in regard to primary
objective. However ascertains costs will be not enough organization
require to control cost timely.

Therefore the study is designed to concentrate on the application of cost

accounting areas to determine the following basic question for Ethiopia
plastic share company.

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

2. How does each of the production costs recorded in Accounting
department?
3. Would the costing system help in eliminating varibus wastages?
4. Does

the

costing

system

provide

management

with

information for decision making?

5. Does the company have cost standards related with cost?

useful

6. Does the system of cost accounting gurde the management in the

fixation of selling price?

1.3 Statement of the Problem

General objective of the study: the main objective of the study is to
assess and evaluate product costing and pricing system of Ethiopia
plastic share company

Specifically the paper will

Examine the costing system and classification of cost

Assess how direct material, Direct labor and manufacturing over

head costs are recorded

Assess the accounting treatment for spoilage and scrap

See if there is a timely preparation of cost report for decision

making

Examine if the company have cost standards

See whether costing methodology is used as a guide for pricing

decision.

1.4 Research Design and Methodology

The study used different methodology as a means of data collection,
analysis and report preparation. The study selected the sample for
data collection from the management of the company and cost
accounting staff.

1.4.1 Data Collection

The researcher made primary and secondary data collection to
evaluate and assess the accounting system of Ethiopia plastic share
company. The primary data was the one which was obtained from
sources inside the company using interview for the management as
well as accounting staff.

On the other hand, secondary data was obtained from annual

reports, cost manuals and journals.

1.4.2 Data Analysis

10

In the data analysis stage the researcher used tabulation as well as

graphical techniques to evaluate the various data obtained during
the data collection stage

1.4.3 Data interpretation and Recommendation

The final findings of the study is presented in report format and
contain text as well as some formats used in the system. In addition
some techniques that can be used in implantation of a proper
costing system were sited in this report.

1.5 Scope of the Study

The study focused on the production costing system in Ethiopia plastic
share company. The study did not want into detail of the other accounting
aspect of the company unless it is related to the costing implications. The
study emphasize on manufacturing cost (material, labor and overhead) In
addition the study covers some important aspects which should be
considered in setting proper prices in selling products and its application
in Ethiopia plastic share company.

11

1.6 Significance of the Study

Studying the costing system and its application vis avis the
theoretical review will be important. The study has the following
importance. First in doing the research the student researcher
improves his/her research still. Second the recommendations given
at the end will help the organization to improve its inefficiencies and
finally, the research work can serve as starting pant for further
research on the same topic.

12

1.7 Limitation of the Study

The research study was not free from limitation. There were some
issues which has hindered the attainment of the study objectives. Some
limitation that the researcher face was shortage of time not to assess all
aspect of the company operations, unable to get the desired information
or lack of adequate information. The research work was also unable to

13

get some information were company confidential and reserved from the
research presentation.

1.8 Organization of the Study

14

There are four chapters included in the study. The first chapter deals
with the introduction, Background of the study. Background of the of
the study statement of the problem, scope limitation. Research design
and methodology. The second chapter presents the literature review of
cost and cost accounting. The third chapter includes the result and
discussion and finally summary conclusion and recommendation is
stated in the forth chapter.

CHAPTER TWO

15

2. Literature Review
2.1 Definition of cost and cost Accounting
Cost is defined as resource scarified or forgone to achieve a specific
objective. It is the amount of expenditure incurred on or attributable to
a given product or service referred to as cost object. A cost object is any
activity for which a separate measurement of cost undertaken, it would
include a product, service, a sales region or other identifiable activity
(G. Foster, 2003, P-28)

It helps to evaluate operations and provide information for reporting,

internal planning and control and make appropriate decision. In order
to determine this it will be important to see what cost constitutes. (N.
Coulthurst, 1999, p-75)

Cost Accounting is the field of accounting that measure, records and

report information about cost represented in the accounting system by
out lays of cash, promise to pay cash in the future and expiration of the
value of an asset. These include the cost of inventory, the cost of
increasing sales volume and cost saved from energy efficiency
equipment. (Edward and Michael, 1991, P.77)

Thus cost Accounting is used to indicate the tendency of costs to make

a choice among the elements. This will enable to control the over all
costs and help the firm to cope with prevailing competition of similar

16

procedures specially in manufacturing organization. (Edward and

Michael, 1991, p-77-78).

2.2 Classification of Costs

There are different methods of classifying costs depending on the purpose
in which the information is to be used, similar costs are grouped to aid
managerial decision making and to produce the analysis necessary for
external financial reporting cost items can be similar to one another in
several different aspects, the particular classification depends on the
purpose of grouping costs together. Costs can be analyzed by function, in
which case possible function with in organization are manufacturing
administration, selling, distribution, research, etc. The criteria used will
depend on the reason for which the information is being collected.
(N. Coulthurst, 1999, p.77).

A. Time period for which the cost is computed

Time can be broadly classified in to past and future; cost can also be
classified according to those time periods (O. Cherringation, 1994,
p.20).

1. Historical costs
Are those that were incurred in the past period (O. Cherringtion,
1994, p-20).

2. Budgeted costs
Budgeted costs are those that are expected to be incurred in the future
period. (O. Cherrington, 1994. p-31)
B. Classification by behavior

17

Cost behavior describes how a cost changes with time or changes in

volume. (O. Cherrington, 1994. p-31).

1. Variable Costs
Are those vary proportionally on total as the volume of production or
sales changes. (O. Cherrington, 1994. p-31)

2. Fixed costs
Fixed cost remain constant in dollar amount as volume of production or
sales changes (O. Cherrington, 1994. p-31-32)

C. Classification by traceability of 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. (O. Cherrington,
1994. p-45).

2. Indirect Cost
Indirect cost is one that is not directly traceable to the manufacturing
product (O. Cherrington, 1994. p-45).

2.3 Elements of Product Costs

Cost accounting systems are appropriate for all business, whether large
or small manufacturing or service, and regardless of their ownership
structure. However, greater scope for more extensive cost analysis, and
thus also for subsequent use of information, is provided by a

18

manufacturing environment. In order to compute effectively, business

engaged in manufacturing have been required to produce increasingly
sophisticated products of the highest quality and with first class service,
but at low cost, (N. Coulthurst, 1999, p-81).
Product costs are classified according to the three elements of cost as
direct material, direct labour and overhead costs (T. Horngren, 2003, p25).

2.3.1 Direct Material Costs

Direct materials are those materials which can be conveniently identified
with and allocated to cost units. They are the acquisition costs of all
materials that eventually be come part of the object and that can be traced
to the cost object in an economically feasible way. Acquisition costs of
direct materials include freight in charges, sales taxes and custom duties.
(T. Horngren, 2003, p-30).

Direct materials are the raw materials from which the product is made and
comprise the value of materials that are physical observable as being
identified with the finished good and that may be traced to the finished
product in an economically feasible manner (T. Horngren, 2003, p=30-31).

2.3.2 Direct Labour Cost

Labour cost is the cost of remuneration such as wages, salaries,
commissions, bonuses, etc. Direct manufacturing labour costs include the
19

compensation of all manufacturing labour that can be traced to the cost

object in an economically feasible way. Direct labour consists of wages paid
to workers directly engaged in converting raw materials in to finished
products. These costs can be conveniently identified with a particular job
or process (T. Horngren, 2003, p-32).

2.3.3. Manufacturing Overhead Costs

The total of all indirect costs is termed as overhead costs, non productive
cost, factory burden, supplementary costs, are all manufacturing costs
that are considered part of cost object in an economically feasible way
example include power samples, indirect materials, indirect Manufacturing
labour plant rent. Plant insurance, property taxes on plants plant
depreciation and the compensation of plant managers (T. Homgren, 2003,
p-36).

2.4 Non-Manufacturing Costs

Non manufacturing cost are those costs nor related with the product and
normally referred as periodic costs. These costs can vary so much
according

to

administrative

the

organization.

expenses,

The

distribution

major

classification

expenses,

research

can

be

expense,

financial costs, etc. under these classifications there could be sub

classifications which would be found in different categories. Examples
could be salary rent, tax, electricity water etc. (D, Willamson, 1999, p118).

2.5 Costing Methods

20

The methods or types of costing system refer to the techniques and

processes employed in the ascertainment of costs. There are different
methods of costing for different industries. The methods of costing to be
used in a particular company depends up on the type of manufacturing
and nature of industry. (D. Willamsan 1999, p-219).

2.5.1 Job Order /Batch Costing System

Job order costing is method of ascertaining cost in those industries in
which goods are manufactured or services rendered against specific order
from customers. A job order cost system manufacturing accumulates costs
of material, labor and manufacturing overhead expense by specific orders,
jobs, batches or lots. Job costing system is a method in which cost object
is a unit or multiple units of a district product or service called a job. Job
order costing system are widely used in construction, furniture, printing
and similar industries where the costs of a specific job depend on the
particular order specification. (D Willamson, 1999, p-220).

2.5.2 Process Costing System

Process costing is applied in cases where the identify of individual orders
is lost in the general flow of production. In this process the cost object is
masses of identical or similar units of product or service. Industries to
which process costing is applied produce uniform products without
reference to the specific requirements of customers. Example Textile,
sugar, paper, shoes plastic factories chemical industries etc. (N Arora,
1997, p-99).
According to M.N Arora process costing follows the following Procedures.
21

1. The factory is divided in to a number of processes and an account

is maintained for each process.
2. Each process account is debited with material cost, labour cost,
direct expenses and overhead allocated or apportioned to the
process
3. The out put of a process is transferred to the next process in the
sequence.
4. The finished out put of the last process is transferred to the
finished goods account.
A single work in process account may by used by a company that has only
one producing department or continuously produces a single product. On
the other hand departmental work in process accounts are preferable if
production flow through several cost centers or departments separate cost
figures for each process might also be desirable. In a manufacturing
process. Costing setting, each unit receives the same or similar amounts of
direct materials costs, directs labour costs and indirect manufacture costs.
(T Horngren, 2003, p-277).

According to Charles T. Horngren there are five steps in calculating unit

costs in process costing system. These steps are.
1. Summarize the flow of physical units of out put
2. Compute out put in terms of equivalent units
3. Compute cost per equivalent unit
4. Summarize total costs to account for

22

5. Assign total costs to units completed and to unit in ending work

in process.
A. Accounting for materials
The cost of materials issued during the month are charged to work
in process and to manufacturing overhead by analyzing the
materials issue voucher. The following entry will be made.

Work in process I

- xxx

Work in process II

- xxx

Manufacturing over head control xxx

Materials inventory xxx

B. Accounting for manufacturing over head

Manufacturing over head costs that have been accumulated and
classified in departmental overhead analysis sheets during the
period usually a month are allocated to producing departments or
processes. They may be allocated either directly by predetermined
rate or by some combination methods. (T. Horngre, 2003, P 278).
Work in process I

-xxx

Work in process II

- xxx

Manufacturing overhead applied - xxx

C. Accounting for Labour Costs

23

Labour costs are picked up from monthly payroll Summary by

departments or processes
Work in process I

-xxx

Work in process II

- xxx

Manufacturing overhead Control - xxx

Factory payroll clearing xxx
D. Cost flow through Departments /processes
As out puts flow from departments /process to the next level to completion
the costs are transferred from one process to the next. The journal entry
shall be as follows.
Work in Process I

-xxx

Work in process II -xxx

Finally when the goods are transferred to the ware house the work in
process account will be closed and the following entry shall be made
(T. Horrgren, 2003, p 279-280).
Finished Goods Inventory

- xxx

Work in process

- xxx

In this application of this process costing system the major difficulties will
be the accounting treatment of process losses, determination of equivalent
units and costing of joint products and by products.
Joint Product
Arise when two or more product with nearly equal value are produced from
a single input of raw material. For example processing of crude oil yield
gasoline, kerosene, paraffin and benzene (T. Homgren, 2003, p-280).

24

By-product
Are left over material that results when producing the main or joint
product. For example sawdust and scrap woods are left over after
processing lumber. By product normally have low sale value compared
with the sales of the main joint product. (T. Horngren, 2003, p-280).
Accounting for Joint Product
Throughout most of manufacturing, joint product cannot be identified as
separate product only at a particular joint in the production process culled
split off point separate product become identifiable.

Cost incurred in processing before the split off point is reached are called
joint cost. There are three methods of allocating joint cost.
1. Sales value method
2. The physical joint method
3. The assigned weight method

1. Allocation by Sales Value Method

This method is commonly used method that allocation joint cost based on
the sales value of each product at split off point.

This method is based on the factory /theory that the higher the selling
price of a product the more the cost should be allocated to that product.
2. Allocation by Physical Unit Method
25

Use common physical unit of measures such as weight of volume as basis

to allocate joint cost as split off point

2. Allocation by assigned weight

Under this method firms develop their own formula for appointment- In
this method products assigned a higher weight factory will receive a
greater allocation of joint cost,
The weight factor assigned can be used based on many considerations
such as a physical size of the product, the difficulty manufacturing of the
time involved in making the product verity of materials used etc.

2.6 Cost Recording and Cost Accumulation Procedures

A company or an organization is responsible for proper recording and
accumulation of costs especially cost department. (O. Cherrington, 1994,
p-10).

A Cost Recording
I accounting for material
The material account is affected by transaction such as purchase issue for
use, return of unused material spoilage and damage of obsolesce
(O. Cherrington, 1994, p-10).
1. Purchase of Materials
Material purchase have own treatment for freights, clearing and handling
cost. Such cost can be material or manufacturing over head cost which is
charged on the basis of pre determined price that help to identify direct
and indirect material. The cost of material includes the invoice amount

26

plus other costs paid to put the material in place ready for use. Costs
typically include the invoice amount, shipping cost (freight in), sales tax,
costs of delivery. Etc. (O.Cherrington, 1994, p 13).

Trade discount, purchase discount, quantity discount should not be

included in the cost of material (O. Cherrington, 1994,p-13).
Purchase Discount
Purchase discount refers cash discounts. It is usually profitable to pay the
invoice with in 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 purchase discount. (O.
Cherrington, 1994,p-23).
Freight in
Freight in is an ordinary, and necessary cost of purchasing material. The
journal entry for purchase of material with freight in would be (O.
Cherrington, 1994, p-23).
Fright in

- xxx

Material inventory xxx

Account payable /cash xxx
The income statement as financing expense paid after

the discount

period the journal entry

Account payable

-xxx

Purchase discount loss xxx

Cash xxx
-

Paid within discount period, the journal entry would be

Account payable - xxx
27

Cash - xxx
Purchase discount xxx
2. Material Issued
The direct material consumption is charged to working in process
(O. Cherrington, 1994, p-24-25).
The journal entry will be
Working in process - xxx
Factory overhead

-xxx

Material inventory xxx

There are three cost flows of material assumptions that must be
consistently applied for similar categories of materials (O. Cherrington,
1994, p-318-329).

1. First in first out

The cost of the first material received is assumed to be the cost of the first
material issued.

2. Last in first out

The cost of the last material received is assumed to be the cost of the first
material issued.
3. Average method
It uses the average cost of material purchased is assumed to be the cost of
the firm material issued.
II Account for Lbour Cost
There are two general set of journal entries required to account for labour
costs. The first set records the cost and payment of labour benefits. It
includes salaries, wages and incentive plan. (O. Cherrington, 1994,p-433).
The journal entry to record cost and payment of payroll.

28

Working in process - xxx

Factory overhead

- xxx

Marketing expense -xxx

Tax payable xxx
Medical insurance payable xxx
Payroll payable - xxx
Payroll payable xxx
Cash

-xxx

The second set of journal entry to record cost and payment of employees
payroll expense is
Working in process - xxx
Factory overhead

- xxx

Marketing expense

-xxx

Administrative expense xxx

Tax payable xxx
C. Accumulation procedures
For the above indicated process of classification and accumulation of cost,
there are formats having procedures for the assigned bodies of the
management and cost Accountant to the application and proper usage.
(O. Cherrington, 1994, p-314).

1. Product Order

29

It is used to authorize production departments to carry out jobs according

to specific details from one department to other department
(O. Cherrington, 1994, p-314).

2. Job Order Cost Sheet

The basic document opened to accumulate direct material, direct labour,
and applied overhead cost of job to be manufactured according to the
specific order to consumer (O. Cherrington, 1994, p-314).

3. Material Requisition
Materials used are classified in to direct material and indirect material in
the requisition. The consumed part will be entered into material section of
job order cost sheet. (O. Cherrington, 1994, p-411).

4. Labour Report
The labour report cost of a product is computed by recording the labour
hour spent by each employee on the particular job using a special form
called labour report (O. Cherrington, 1994,p-432).
Finished goods xxx
Working in process direct labour xxx
Working in process direct material xxx
Working in process overhead xxx

30

Use of Cost Information

2.7.1 Cost for planning and Control
A companys cost information system provides the data required for the
preparation and operation of a budget and for establishing standard
costs.
Budget: - In many companies predetermining or estimating factory
overhead constitutes the intial step to ward a budget program. The

31

budget program lists of all members of management in the task of

creating workable and acceptable plan of action welds the plan in to
homogenous unit. Communicate to all managerial levels difference
between planned activity and actual performance and point out un
favorable conditions which need corrective action.

Standard cost: - Closely allied with the budget are standard cost which
are predetermined cost of direct material, direct labour and factory over
head. They are established by using information accumulated from past
experience and data secured from research studies and it helps the
management to form the foundation for the budget.

A standard cost under given condition which is held constant in order

to observe and measure fulgurations. The measurement of deviation
from established standard or norms in accomplished with the aid of
variance accounts. The measurement of deviation is similar to budget
comparison in that they compare actual with predetermined data.

Cost for Analytical propose

Different type of involves Narying kind of consideration in managerial
analysis for decision making. For example differential analysis for
decision making in different and out of pocket cost are type of cost
32

which attempt to envision when management in faced with the problem

of abandoning one product and substituting another decision will
demand the consideration of opportunity cost. If expansion of
operating facilities is contemplated the relevant cost are future costs to
be incurred should a project should be a abounded of capital cost never
fully recovered through revenues, the companys management will face
a cost situation that is formed a sunk cost. The many time and the
disposal value of facilities.

Cost of production Report

1. Statement of Goods Manufactured
It includes the cost of goods brought the completion (finished) during the
year whether they were stated before or during the current year some of
the manufacturing cost incurred during the year are held bacxas cost of
the ending work in process inventory similarly the costs of the beginning
work in process inventory similarly the costs of the beginning work in
process inventory become part of cost goods manufactured. (T. Harmg ren,
2003, P.4041).
The financial statement preparation for cost of goods manufactured.
Direct material used cost

-xx

Direct labour cost

-xx

Manufacturing over head cost xx

Cost incurred in current period xx
Add work in process beginning -xx
Total cost incurred a date
Less work in process ending
Cost of goods manufactured
33

xx
-xx
xx

2. Income Statement
It is the operating income after deducting cost of good sold and operating
expense. (T. Horngren, 2003, p.41).
The schedule for income statement preparation is as follow.
Revenue

- xxx

Cost of good sold

Beginning finished goods

xxx

Cost of goods manufactured

xxx

Cost of goods available for sale xxx

Ending finished goods

-xxx

Gross margin (or gross profit)

xxx

Operating expense (costs)

xxx

Marketing, distribution,
Customer service costs etc. xxx
Operating income

xxx

Pricing Models
Pricing models in manufacturing firms are based on cost relation ships.
Prices based on costs are popular because they are easy to use and
easy to understand. A very simple and widely used cost based pricing
model in manufacturing

firms is known as cost plus pricing with a

cost plus a certain amount or percentage is added to the product cost

determining it selling cost. If uses current selling price and competitors
price. (Hilton, 1997, p-751)
34

Many manufacturing firms use a cost plus or what sometimes referred

to as mark up pricing method to set selling price for their products.
Cost plus pricing means cost plus a certain mark up. Which is
sufficient to cover administrative and marketing expenses and give a
reasonable percentage of profit. But give due consideration to charges
in current market price of the product and in put cost (Direct materials
direct labour and indirect manufacturing costs incurred to produce a
product, that is the price of the product for the company. Even
sometimes, the company sets its products a price greater than the
current selling price available in the market on the presumption that its
products are of higher quality that other competitors products. (Hilton,
1997, p-751).

CHAPTER THREE
3. Result and Discussion
Background of the company
35

Ethiopia plastic share company (EPSC), established in 1952 E.C. It is

one of the oldest industrial establishment in the country. The company
(factory) is engaged in the production of various types of plastic
products such as poly-products, w.re and cables, Garden hose, conduit,
scatolas, shutters, floor tiles, plastic bottles, Jerry cans, boot shoes,
house utensils and many other plastic goods.

The plant was initially established by foreign nationalities in a form of a

share company with an authorized and paid up capital of 270,000 br
and employed about 10 workers. In 1975 the plant was partially
nationalized and was administered by board of directors and in 1979 it
was fully nationalized and came under the supervision of the then
national chemical corporation and its capital grew to 2,200,000 br with
the work force to over low. Currently the plant with an authorized and
paid up capital of 29,670,000 br has aboput 380 employees and its
annual sales is over 137,000,000 br and makes a net profit of well over
23,000,000 br per year. This factory is found in Addis Abeba at Kirkos
Kifle Ketema and at mangenaga.

Preliminary Review and

Overview of the costing system
Cost information is essential for managers and decision makers in all
types of organization whether they are profit making or not. This
importance

grows

when

the

organization

is

in

environment where advantage should be taken instantly.

36

competitive

Considering these importance, the paper tries to assess the costing

system used by the company for its different products. The main
products of Ethiopia plastic share company are the following
Poly products
Wire and cables
Carden hose and conduit
Scatolas
Floor tiles
Plastic bottles
Jerry cans and boot shoes
In this chapter, the cost accounting system of the company will be
analyzed based on the general standards set in the literature review

3.2.1 Costing system

There

are

different

acceptable

costing

methods

to

be

used

for

manufacturing companies depending on the type of products and

production methods. Job / batch costing process costing, contract costing
etc. are the major ones cited in many literatures. The different products
being produced in Ethiopia plastic share company uses process costing
method in its simple form due to similarity of the product in each
production units.

3.3.Operating Expense

37

These are expenses included under the general heading.

1. Administrate and general Expense
These are expenses incurred in the direction, control and administration
(including accounting, general expense for examples are the expenses in
running the administration of the plant such as salaries and wages of
personnel in the managers office. Finance and administration divisions all
legal service costs, financial costs etc.

2. Marketing Expense
These are expenses incurred in publicizing and delivering of products to
customers such as felling costs (salaries and wages of sales staff,
consumer service costs etc.). Publicity cost (Advertising and promotion
expense) and distribution cost (ware housing salable products and
delivering products to customers).
Pictorial presentation of cost classification in Ethiopia plastic
share company
Product Costs
Direct materials
- All costs to bring

Direct labor

- Salaries and Wage - Salaries and

- Allowance

The materials ex-sture

Manufacturing overhead

Wages

- Overtime

- Allowance

- Insurance labour

- Utilities and Expense

- Medical

- Depreciation

- Provident fund

- Medical

-Canteen and

- Insurance

Cafeteria
- Others

38

Figure 3.1 Product Costs

Cost Accumulation at Ethiopia plastic share Company

Direct raw materials cost accumulation cost accumulation for direct
materials in the company depends on source of supply for the item. Some
materials are imported and some are brought locally (copper wire)
- Imported raw materials
The cost for imported raw materials includes
-

Invoice price

Marine Insurance

Ocean freight

Taxes and duties

Bank charges

Some other in identical costs

Local raw materials

Most of the times locally purchased materials will be delivered to the

factory suppliers truck or the company transportation. The company
rarely uses rented transportation for such purposes. In all instances the
costs will be only the invoice price charged by the supplier other related
costs are not accounted as raw material cost.
Accounting for raw material cost
As described earlier, the cost component varies for local and imported raw
materials. The cost accounting treatment follows the material flows and
uses different source documents.
The cost accumulation system for the company is in line with its cost
classification. Proper performance evaluation could be made only when the
39

source data accurately coded, classified and reported in time. The

determination of direct material cost used by the company is based on
generally accepted accounting principles (GAAP). The following diagram
shows the flow of costs in different stages in the company.

Imported
Materials
A. Purchasing

Local purchase

Suppliers
costs
- Invoice

Import
costs

Inland costs

-Insurance

-Transport

Suppliers
cost
-Invoice

- Bank charges - Unloading

- Transit
- Part charge
- documents

Receiving section
Good receiving note

Copy to finance

B. Production
Material
Request

Raw material
Stores

-Stores Requisition

Store issue

Copy to finance

Voucher

Preparation
Mixed raw materials

Copy to finance

Production
(Finished goods

40

Transfer Voucher)

Finished goods store

C. Marketing
Sales
section

Request for delivery

Copy to finance
Custom
er

Fig. Raw material cost flow in EPSC.

Source: - Secondary data cost manual
The accounting treatment for different stages of the diagrham can be
summarized as follows the source document for the receipt of the items
in to stores in Good receiving notes.
I.Good Receiving
Raw materials inventory - xxx
Alp/cash

- xxx

II. Transfer finished product to store

Finished good inventory

- xxx

Production cost contra -xxx

Direct labor cost accumulation
There are different cost component for direct labor. These costs can be
grouped in to two by method of payment. Those directly taken from payroll
and others paid through various vouchers.

The company pays and prepares its payroll classified by departments. The
employees are segregated in the payroll in to direct labor manufacturing
overheads and non-manufactories overheads which is divided by various
support departments.

41

The accounting treatment is simplified as all the payment is made through

the banking system. There is no need for unclaimed salaries or payroll
fund account.
The entries are as follows
Direct labour expense
Salaries and wagers

-xxx
-xxx

Allowance xxx
Provident fund xxx

Non manufacturing overheads (by department)

Salaries and wages

-xxx

Allowance

- xxx

Provident fund

-xxx

Income tax payable -xxx

Cash at bank (net pay) xxx
For those items not paid through payroll but through other source
documents like purchase of uniform or settlement of medical bills there
entries are as follows.
Direct labour costs by type of expense
Medical - xxx
Insurance xxx
Cash Alp xxx

42

The cost accumulation for direct labour cost is based on the historical
concept. This is an accepted treatment of costs for external reporting and
internal purposes.

Manufacturing overheads accumulation

The actual costs incurred are accumulated according to the nature of
expense in the production cost section classified by chart of accounts.

Indirect materials follow the steps used for taw materials and
indirect
S
labour costs follow same step used for direct labour costs. The rest will be
handled as follows.
-

Manufacturing overheads by type of expense

Geatricuity
Water

- xxx

- xxx

Repour and maintaninance

Cash Alp

-xxx
-xxx

Blow Molding

--

Film Blowing

Printing
A
Cutting and seal sing

Injection

Boot Production

Wire, cables and shutter profile

43
PipeInx
production
filling
Flour
Extrusion
Gushing
and
and
tiles
Assembly
granulating

Usable sorap warehouse

Compounding and granulating
Fig 3.3 Cost flow chart for the production process
Source. Secondary data Cost manual

Manufacturing Overhead Costs

All production costs not included as direct materials and indirect labor
are grouped as manufacturing or production overheads. This cost
comprises different things in the company cost coding scheme.

Summary of manufacturing overhead cost

44

No
1

Types of expenses
Salaries and wages

Amount

Indirect materials

190,000

Electricity

250,000

Depreciation

930,000

Uniform and outfits

Repair and maintenance

Water & others

227,000

18,000
600,000
30,000

Total
Source: Secondary data

2,245,000

Cost Accounting for Scrap

Scraps are discarded material, having some value, which is either
disposed

without

further

treatment

or

re-introduced

into

the

production process to either product of lower value.

The scrap in Ethiopia plastic share company is reprocessed and asked

as raw material for subsequent production of basic products. In most
cases, the scrap material before being used as raw material is
reprocessed. This entrains processing cost which must be properly
accounted. On the other hand the scrap materials being removed from
the production process have value that has to be accounted as a
reduction from work in process and an addition to raw material stock.
Scrap returned to raw material ware house
Material Control

-xxx

Manufacturing overhead control

45

- xxx

 Scrap is reprocessed
Work in process

- xxx

Material control xxx

Cost of product for

Setting selling price
In Ethiopian plastic share company. Cost plus mark up is taken as the
primary base for determining selling prices. Selling price is determined
after calculating cost of product.
Ethiopia plastic S.C
Cost Build up sheet for product
A. Type of raw material
Raw Material 2

Raw material 2

Qty inky

xx

xx

Unit cost

xx

xx

Total cost

xxx

xxx

Allowance xx

xx

Xxx

x
xxx

Total material cost

xxx

B. Direct labour cost

Cost center

xyz

Time required to prod n

Xx Dum (xxkg) in min

Average labour cost

Total laobur cost

xx

C. F.O.H Cost xxx of Direct labour

Production cost

xx
xxx

46

D. Operating Ex. xx% of Direct labour

xx

Total cost

xxx

Then there will be selling price at different margin.

As wire and cable product accounts about 54% of the companys sales
volume. The researcher takes if as an example.
Ethiopia plastic Shire Company
Cost Build up sheet
For insulted wire # 1x2.5
A. type of raw material
Copper
Quantity in kg
Unit cost

Allowance (scrap) 3.0%

P-insulation

0.75

150

16

450

11.25

13.5

3.0% 0.34

463.5

11.59

Total material cost /100 mts 475.09

B. Direct labour cost
Cost center

wire and cables

Time Required to produce 100 mts (mri)

8.5

Average labour cost

0.5

Total labour cost

4.25

C. F.O.H cost 420% of Direct labour

17.85

Production cost

497.19

D. Operating Expense 300% of Direct labour

12.75

Total Cost

509.94

Total Cost Dum per

10%

Selling price at different P. Margin

15%
20%
25%
30%

47

100mts xxx 509.94

560.93

586.43

611.93 637.43

662.92

Dum. Different unit of measurement

This Dum may kg. piece, meter Bundle etc
Existing selling price before tax 460 br

Standard Costing
Standard costing is one of the variance that shows the costing system of
an organization whose activities consist of a series of common repetitive
operation.
The Ethiopia plastic share co. use standard costing 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 detected and controlled at the source. But
the decision made based on standard costing seems disorder since the
standard used is basic standard which is not updated. In reality basic
standard cost is the costing system in which it may have been updated to
reflect changes in price and technological changes, then this results in
accurate estimates of actual costs. Thus, the decision made based in this
standard cost will be greatly influenced and this will not be much useful
for control purpose.

Despite all the above condition the company is beneficial in using standard
costing system at hand for managerial decision making and control. Thus
it hellos in adjusting the devotion occurred in different costs and operating

48

result. i.e by comparing the actual results with standard, this also help
them to take relevant corrective measures.

According to the cost and management professions, standard must be

updated production process by the Ethiopia plastic share co. budget
standards are not updated periodically to reflect changes.

CHAPTER FOUR
4. Summary of findings Conclusion and Recommendation
These chapter summarizes the main finds of the study and forwards
recommendations based on the conclusion.

Summary of findings and Conclusion

The study was designed to assess the cost accounting system of the
Ethiopian plastic share company. It is also intended the study has come
up with the following findings presented.

The basic cost classification systems used in the company are direct
material,

direct

labor,

manufacturing

overhead

and other

non-

manufacturing costs. This type of classification suites most of the

general financial reporting.

The cost flows for materials laborr and overheads are highly based on
historical costs. This type of reporting is based on Generally Accepted
Accounting pineapples. GAAP are
49

manly useful to produce standard

financial

reports,

which

are

useful

to

present

the

compares

performance to general purpose financial statement users. Cost

accounting

concentrated

internal

users

mostly

management.

Management must have historical as well as futuristic data to support

its decision. To costs could be used to see the effect of decisions.

Ethiopia plastic share company use process costing method due to the
homogeneity of the product in each production units.

The company uses cost plus mark up as well as market price bench
marking its various products. Such method enables the company to set
fair prices however the market in certain areas is with stiff competition
and change in price can not be easily introduced.

To the company goals are being met management must rely cost
accounting information. Cost accounting not only aids managers in
directing day to day orations but also provide feed back to evacuate and
control should be available as soon as possible after the end of the
period.

According to the study the factory used standard costing of basic

standard type whine 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 in efficiency and waste may be detected and controlled at the
source. This standard costing is not accurate estimate of cost.

50

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 an going operating costs and
special decision making. Thus cost and managerial purposes it
deserves to recommend that cost and managerial purposes it deserves
to recommend that every company should include it under its
operation. Ethiopia plastic share company is not an exception for these
facts. The company has included most of the cost accounting system
and practices. Nevertheless, the researcher needs to recommend the
following area.

The company should revise the standard costing because it is not

updated to the current situation. This standard costing is not
accurate estimates of cost hence it has a substantial impact on
the decision made.

The company should give incentive to motivate and training to

develop skills employee at the work place and outside the work
place like seminars, work shops and experience with other
company.

51

REFERENCE

1. Arora, N., 1999. Cost Accounting. 1st ed.

New Delhi : Vikas
2. Horngren, T.Foster, G.Datar, G.,2003. Cost Accounting:
A Managerial decision-11thed. New York:
Prentice Hall
3. Coulthrst, N., 1999. Cost Accounting:
Principles and applications. 4thed. Singapore: B and Jo
4. Cherrington, 0., 1998. Cost Accounting. 18th ed.
San Francisco: West
5. Palmer, E., 1986. Cost Accounting. 4th ed.
Creat Brtain: At Foulks
6. Horace, R, Charles, E., 1986. Cost Accounting 4th ed USA: Lynch
7. Web sites
WWW. Cost accounting us/Costing fundamentals. Htm,

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