A RESEARCH ON ASSESSMENT OF COST

ACCOUNTING (A CASE STUDY OF DIRE DAWA

FOOD COMPLEX S.C)

A research submitted to the department of accounting and

finance for the partial fulfillment of the requirement of the
degree of Bachelor of Art (B.A) in Accounting and Finance.

Prepared By: HAIMET ABRHAM 3326/11

Advisor: KALKIDAN ADANE

Haramaya University
College of Continuing Education
Department of Accounting and Finance

July, 2021

HARAMAYA, ETHIOPIA
 Table content

ABSTRACT 3
CHAPTER ONE 4
INTRODUCTION 4
1.1 BACKGROUND OF THE STUDY 4
1.2 BAKGROUND OF THE ORGANIZATION 4
1.3 STATEMENT OF THE PROBLEM 5
1.4 OBJETIVE OF THE STUDY 6
1.4.1 General Objective 6
1.4.2 Specific Objective 6
1.5 SIGNIFICANCE OF THE STUDY 6
1.6 SCOPE OF THE STUDY 7
1.7 LIMITATION OF THE STUDY 7
1.8 ORGANIZATION OF THE PAPER 7
CHAPTER TWO 8
2. LITERATURE REVIEW 8
2.1 What is cost Accounting? 8
2.2 Advantage of Cost Accounting 9
2.3 Classification of costs 9
2.4 Use of cost information 10
2.5 Costing system 12
2.6 Financial reporting 14
UNIT THREE 17
3. RESEARCH METHODOLOGY 17
3.1 Introduction 17
3.2 Types and source of data 17
3.2.1 primary source 17
3.2.2 secondary source 17
3.3 methods of data collection 17
3.4 methods of data analysis 18
REFERENCES 19
APPENDIX INTERVIEW QUESTIONS 20
 ABSTRACT

Cost accounting is used by a company’s internal management team to identify all variable and
fixed cost associated with the production process. It will first measure and record these costs
individually, then compare inputs costs to output results to aid in measuring financial
performance and making future business decisions. Organizations that effectively use cost
accounting are better able to report, analyze, and lead to the improvement of internal cost
controls and efficiency. The main objective of the research is to assess the cost accounting
practice of Dire Dawa Food Complex local company, a local manufacturing share company
how the organization is using cost accounting systems which are in accordance with the
standards and theories of cost accounting and to investigate the over-view of its cost accounting
practices. To achieve this research objective the research will use descriptive research method.
The two known source of data namely primary and secondary data will be used. Primary data
will be obtained from manuals, records, financial statements, other documents related to cost.
Therefore this study will collect data also through questionnaires and interview. To answer the
research questions questioner and interview will be conducted to those who are working in the
company as staff members. The respondents are selected using purposive sampling method.
 CHAPTER ONE
INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Cost is usually defined as a resource sacrificed to achieve a specific objective, usually expressed
in monetary terms (Horngren et al, 2000). Cost accounting is an accounting system that provides
financial and non financial cost related information. Product costing is the cost of direct labor,
direct materials, and manufacturing overhead that are used to create a product. And the purposes
are for preparing financial statement, setting price and for control purpose (Horngren C.T, 2003).
The purpose of cost accounting is to provide key cost information to managers for their decision
making. It provides information for both management accounting and financial accounting. In
general, the objective of cost accounting is to act as a decision-support system for management
to improve performance. In manufacturing firms, Cost accounting provides information for
achieving and sustaining a competitive advantage through manufacturing excellence which
requires attention to all aspects of performance (Turney, 1989).

Taking the above points into considerations this research attempts to access the cost accounting
practice in Dire Dawa food complex company.

1.2 BACKGROUND OF THE ORGANIZATION

Dire Dawa Food complex share company is one of the leading supplies of flour and flour-based
food products nationwide in Ethiopia. Dire Dawa Food Complex S.Co is located in Dire Dawa,
515 kilo meters east of Addis Ababa. Having started its operation in 1995G.C.It is now one of
the most modern food processing plants in East Africa. And it’s involved in the manufacturing
vendor in more than four manufacturing sectors. Which are known as Pasta Factory, Macaroni
Factory, Zebib Biscut Factory and Bread Factory.

The pasta factory is producing the major product of Dire Dawa Food Complex S.Co which is
known as the brand VERA PASTA. This factory is capable of producing 500 Quintals of
spaghetti Pasta per day and makes supply to its valuable nationwide customers. And more
similarly the macaroni and pastini products are the primary deliveries of the company in which
the VERA MACARONI factory is capable of producing 620 quintal of macroni per day and
respectively VERA PASTINI delivers about the same amounts of pastini delivers about the same
amounts of pastini products from its root factory. Furthermore our company provides a wheat
flour product with an overall production capacity of 2000 quintal per day and also 200 quintal
per day from the biscut factory branded as ZEBIB BISCUIT and producing about 110 quintal per
day of daily bread.

When it comes to producing food supplies in mass-scale, safety comes first. This is the
underlining reason this company has taken the initiatives to be awarded international systems
certificates like FSMS (Food Safety Management System) ISO 22000:2005 and EMS
(Environmental Management System) certification ISO 14001:2004. They were the pioneer for
these certificates in the country, and this has helped the company to build the success brand Vera
Pasta.

1.3 STATEMENT OF THE PROBLEM

Cost accounting is a branch of general accounting that provided detailed information’s to the
separate components of costs that have entered into a product. Cost accounting enabled a
determination of the profit or inventory costs on each unit. Unit was defined broadly. It could be
a job, contract, product, department or division. Its determination depended on the needs of
management. General financial accounting was not sufficient for the task because it collected
costs and revenues in total and could only calculate the profit or loss on the firm as a whole, not
on a unit basis (Jordan and Harris 1921).

Cost accounting is the analytical study of the expenses incurred in running a business. The word
analytical is significant in that brought a managerial patina into the opening definition something
not seen before. The cost records provided a control over manufacturing operations that the
general accounting records could not offer. Cost accounting applied to every phase of the
manufacturing operation and to distribution costs as well. A successful cost department would:
1) be tied into the general accounts to guarantee the overall accuracy of the cost figures, 2)
supply reports that represented fair analyses of the original costs, and served as constructive
criticism upon all operations coming within their scope and, 3) supply reports to afford guidance
to the manufacturing heads as to the efficiency of their operations (Sanders 1929).Managers
require information which is relevant, accurate and readily available to formulate and operate
functional strategies and to make decisions on product costing and preparation of financial
reports. Cost accounting includes those parts of both financial and management accounting that
collect and analyze cost information. It provides the product cost data required for special reports
to management and for inventory costing in the financial statements. Production costs include all
costs incurred in the manufacturing company from the receipt of the raw materials and supply of
labor and services until production is completed and the finished product is packed with the
primary packing materials (Prasad, 1981).

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.
 1. What is the current cost accounting practice adopted in the company?

2. How does the company allocate cost to cost object?

3. How is the cost accounting information contributed for management decision making?

4. To what extent management of the company involve cost accounting information in their
decision making process?

5. Is there proper recoding and keeping of cost data?

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

1.4 OBJETIVE OF THE STUDY

1.4.1 General objective

The general objectives of this study was to assess the cost accounting practice of Dire Dawa
Food Complex

1.4.2 Specific Objective

1. To see the recording practice and how the cost records are maintained.

2. To ascertain the cost allocation practice of the company

3. To evaluate the company effort to use cost accounting information for management
decision.

4. To produce appropriate recommendations to improve the company cost accounting

practices.

5. To evaluate whether the company’s cost accounting information prepared help managers
to be effective in their decision making?

1.5 SIGNIFICANCE OF THE STUDY

This research paper has the following importance. First, the output of the study helps the factory
to correct the shortcomings of its cost accounting practice and build on its best practices.
Secondly, the research paper can be used as a basis for further research in the same area and
related research topics in the same industry.

1.6 SCOPE OF THE STUDY

The study would cover as much as possible all aspects of cost accounting practice of Dire Dawa
Food Complex. Then the research paper specifically designed to assess the activities of the cost
department of the company. And finally recommendation would be forwarded about the cost
accounting practice of the company based on the findings on the data analyzed part.

1.7 LIMITATION OF THE STUDY

The limitations that could occur during the time of research study are:-
▪ Some staff might not be willing to give the required information.
▪ The interviewees and our time might not be one the same and one.

▪ Time and financial constraints to go everyday and to collect the data in detail.

1.8 ORGANIZATION OF THE PAPER

The study had five separate chapters. The first chapter is an introduction part including
background of the organization, background of the study, background of the company statement
of the problem, objectives of the study, significance of the study, scope and limitation of the
study. The second chapter presented important related literature review. The third chapter
describes the research methodology that employed in conducting the research. The fourth chapter
describes about data presentation, analysis and interpretation. Lastly chapter five presents
summary, conclusion and recommendation of the conducted research
. CHAPTER TWO

2. LITERATURE REVIEW

2.1 What is cost Accounting?

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

 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 within an organization
to assure appropriate use of and accountability for its resources (Cherrington, 1998, p 5).
 Cost Accounting (or costing) can be defined as the process of collecting, classifying,
assigning and analyzing the costs associated with the activity of an organization (Blocher,
2005).

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

 Cost accounting is the process of measuring, analyzing, and reporting financial and non-
financial information related to the costs of acquiring or using resources in an organization.
For example, calculating the cost of a product is a cost accounting function that meets both
the financial accountant’s inventory-valuation needs and the management accountant’s
decision-making needs (such as deciding how to price products and choosing which products
to promote). However, today most accounting professionals take the perspective that cost
information is part of the management accounting information collected to make
management decisions. Thus, the distinction between management accounting and cost
accounting is not so clear-cut. (Horngren et al, 2018)
 2.2. Advantage of cost accounting

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

1. Pricing annual or periodic physical inventories.

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

2.3. 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
5. Furnishing relevant cost data for analytical processes for decision making. Therefore cost are
classified in to broad category and some of them are listed below.

2.3.1 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 another
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. The cost of wage 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 cannot 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, general helper cleaner and those employees engaged on
maintenance work or other service work. Not directly related to production (Cherrington, 1998,
p28).
2.3.2 Cost in their relation to manufacturing department

Factory is generally organized along departmental lines for production purpose .This factory
departmentalization 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).

2.4. Use of cost information

2.4.1 Cost for planning and control
A company of information system provides the data required for the preparation and operation of
budget and for establishing standard costs.

Budget is a quantitative expression of a proposed plan of action by management for a specific

period and an aid to coordinating what need to be done to implement that plan. A budget can
cover both financial and non financial aspects of the plan and serve a blue print for the company
to flow in an upcoming period. A budget that covers financial aspects quantifies 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 balancesheet.

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 managers 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).
2.4.2 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.

2.5 Costing system

The two basic types of costing systems are used to assign cost to product or service. Which are
as follows

2.5.1 Job order costing system

In this system the cost object is a unit or multiple unit of a distinct product or service called a
job. Job order costing system is a type of cost system that provides for a separate record of the
cost of each particular quantity of product that passes through the factory. Job order costing
system is commonly used by companies with product that are unique and divisible. In this
system costs are assigned to a distinct unit, batch or lot of product, or service. Job is task for
which resources expended in bringing a distinct product or services to market (Cherington, 1998,
p 277).
Examples of business that use job order costing includes
⮲ Construction system
⮲ Furniture manufactures
⮲ Printing firms
⮲ Repair shops,
⮲ Service giving organization
⮲ Garages, etc

2.5.2 Process costing system

In this costing system is used for manufacturing process which produces a single product or
single mix of products continuously for an extended period of time. In this system the cost of a
product or service is obtained by using broad averages to assign cost to mass of similar unites
produced for general sale and not for any specific customers. Average cost over large number of
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).

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 throughout the production process.
 2.5.3 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 in produced continuously
batches with each batch
representing a unique product
2 Cost accumulation By job for a specified number By department or cost
of unit center for a specified period
of time
3 Cost per unit costs accumulated by job Cost accumulated by cost
dividing when job is complete center divided by
equivalent units of
production during a period
of time
4 Reporting By job By cost center or
department

Source: (Cherington, 1998, p 278).

2.6Financial 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 goods 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 goods manufactured ……………………xx
Schedule 3 Cost of goods sold
Finished good beginning ……………………………xx
Cost of goods manufactured………………………. xx
Cost of goods available for sale ………………….…xx
(-) Finished goods ending ……………….…….……(xx)
Cost of goods sold………………………………….. xx

Schedule 4 Income statement

Revenues ……………………………………………... xx
Cost of goods 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 debt.
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 owner’s equity..xx

Source: (Cherington, 1998, p 278).

.

CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1 Introduction

The following different sections are discussing in this chapter. The first section presents the
types and sources of data, method of data collection, sample and sampling technique, and
method of analysis are brief accordingly.

3.2 Types and Source of data

The study will employee both primary and secondary sources of data collection.

3.2.1 Primary Sources

The data used for this study is qualitative and quantitative data from the respondents. Primary
data will be collected by use of close and open ended questionnaires (self-administering
questionnaires) and semi-structured interview questions which will be designed by the
researcher.

3.2.2 Secondary Sources

In secondary data, information relates to a past period. It will be important to use secondary data
in this study as it helps to plan the collection of primary data. Secondary data saves time in
enhancing primary data, provides a larger database (usually) than what would be possible to
collect on one’s own. For secondary source of data manuals, documents, and related reports by
reviewing the financial statement, polices, procedures, organizational structure of the company
and other similar studies will employed to make the study fruitful.

3.3. Methods of Data Collection

This study will be used both quantitative and qualitative data collection methods. Quantitative
data will be collect using questionnaires that will filled by the all Dire Dawa Food Complex S.Co
all staff members including the management bodies and qualitative data will obtain from key
informant interviews within the branch.
 3.4 Method of data analysis
The collected data will be processed, analyzed and interpreted to report the findings of the research to the
management of the company under consideration. The data analysis process will be begin by editing and
classifying the collected data into a more meaningful and relevant information to the study. As to data
classification, the gathered data will be arranged and grouped into similar categories in order to facilitate
the interpretation of the data. The interpreted data will be summarized and concluded into meaningful
way that can be understood by any concerned body. Finally narrative sentences will be used to present the
study report and where necessary descriptive way of data analysis.
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.
 APPENDIX INTERVIEW QUESTIONS
A. To employees
Personal information
Age: ______________
Sex ______________
Education: ________
Experience ________

1. What kind of costing systems are used to accumulate cost?

🖵 job order costing system
🖵 Process costing system
2. How the factory charge labor cost?
🖵 on hourly rate basis
🖵 in the form of fixed salary
3. How do you allocate overhead in this factory?
🖵Direct labor hours
🖵 Machine hours
🖵Direct labor cost
Other
4. How the organization accounts the spoilage scrap and defective units?

5. When materials are received and issued by store department, the cost department
recorded this kind of transaction? Yes 🖵 No 🖵
6. Do you have in your organization a standard costing system yes 🖵 No🖵
7. if yes what type?
🖵 Basic standard (not up dated)
🖵 Theoretical standard
🖵Other specify
8. What is the benefit of using standard costing?

9. who is responsible to appoint when variance occur?

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

11. Do you calculate labuor efficiency variance? Yes 🖵 No🖵

12. If yes what do you think are the main courses of labor efficiency variance?
🖵 Personal difference
🖵 Failure to maintain machinery in proper
🖵 Condition
🖵 Negligence
13. Do the actual costs usually agree to the budgeted cost? Yes 🖵 No 🖵
14. Is your costing system computerized?
15. Do you accumulate production costs in each cost centers?
16. How do you evaluate cost of work in process of each cost centers?
17. How do you calculate equivalent unit of work in process?
18. Which valuation method do you use for work in process (FIFO OR weighed average?)
19. Are there any byproducts of the main product?
20. How is the cost of byproducts and scrap material treated?
21. In what frequency do you prepare cost of production report in each cost center?
22. 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 is important.