CHAPTER ONE

INTRODUCTION
1.1. 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.

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1.2 Statement of the Problem

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 useful information for decision
making?
5. Does the company have cost standards related with cost?
6. Does the system of cost accounting gurde the management in the fixation of selling
price?
1.3.. Objective of Research
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

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 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. 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.

1.5 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.

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

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1.7 Organization of the Study
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.

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 CHAPTER TWO
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 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

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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
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).

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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
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, p-
25).
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 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

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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 the organization. The major
classification can be administrative expenses, distribution expenses, research 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, p-118).

2.5 Costing Methods

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

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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.

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
5. Assign total costs to units completed and to unit in ending work in process.
A. B/mgt 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.

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Work in process I - xxx
Work in process II - xxx
Manufacturing over head control – xxx
Materials inventory – xxx

B. B/Mgt 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. B/mgt for Labour Costs

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

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 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).
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).

B/mgt 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.

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2. Allocation by Physical Unit Method
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
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).

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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
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.

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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.
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
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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
2.7 Use of Cost Information
2.7.1 Cost for planning and Control
A company’s 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 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.

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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.

2.7.2 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 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 company’s management will face a cost situation that is formed a sunk
cost. The many time and the disposal value of facilities.

2.8 Scrap Spoilage and Defective Goods

1. Scrap
Scrap is remnant or residual that remain after primary product has been manufactured. It is an
expected by product from production of a value product. For example, in a lumber mill scrap
would be bark, shavings, end pieces and sawdust. This scrap can be accumulated and later sold
to individual or to other business that need this scrap as a raw material for manufacturing their
product. The method of accounting for scrap depends primarily up on its value and how readily
the value can be determined. (O, cherringtion, 1994, p-284).

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2. Spoiled Good
Spoiled good can be the result of improper workmanship or perhaps a result of equipment
malfunctioning. In any cause the spoiled goods can not economically corrected and are sold as
damaged goods. The accountant must decide if the loss associated with the spoiled goods should
be charged to a specific job or to factory over head control account which spread the cost over
the entire job worked on during the period. If the spoiled good are considered a normal part of
the production process, then debit the factory over head control account for the loss. If the
spoiled goods are the result of a special order and considered unique to this order then the loss
should be charge to this job. In either event a spoiled goods inventory account should be debited
for expected sales value (O, Cherringtion, 1994, p-284).

3. Defective Units
Defective units have imperfection but can be economically corrected with additional material.
Labour and factory over head cost. It worth the time and effort to correct the defect because the
sales value of the finished product exceeds the expense of correcting defect. (O, cherringtion,
1994, p-284).

2.9 Cost Accumulation, Assignment, Allocation

1. Cost Accumulation
Cost accumulation is the allocation and collection of cost data in some organized way through an
accounting system.

2. Cost Assignment
 Is a general term that encompasses with
A. Tracing accumulated cost to cost object
B. Allocating accumulated cost to cost object
The costs that are traced to cost object are direct cost and the cost that are allocated to cost object
are indirect cost.
 Cost tracing is the assigning of direct cost to the chosen cost object.
3. Cost Allocation

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Cost allocation is inescapable problem in nearly every organization and in nearly every face of
accounting
Terminology of Cost Allocation
 Cost object:- is anything for which a separate measurement of cost is desired
 Direct cost of a cost object-: Cost that are related to the particular cost object and can
be traced to it in an economically feasible way.
 Indirect cost of a cost object:- Cost that is related to particular cost object but cannot
be traced to it in an economically feasible way.
Purpose of Cost Allocation
 To provide information for economic decision
 To motivate manager and employees
 To justify cost or computer reimburseinent
 To measure income and asset for reporting to external parties
2.10 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 xx
Less work in process ending -xx
Cost of goods manufactured xx

2. Income Statement

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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

2.11 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 competitor’s price. (Hilton, 1997, p-751)

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).

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 CHAPTER THREE
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.

3.1 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.

3.2 Data Analysis

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

3.3 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.

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 CHAPTER FOUR
Result and Discussion
4.1. , Background of the company

Ethiopia plastic share company (CPSc), 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.

4.2. , 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 a
competitive environment where advantage should be taken instantly.
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

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 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

4.2.1 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.
4.3. Classification of Costs
Cost classification is a base for the type of information to be provided by any cost accounting
system. Proper cost classification enables decision makers to concentrate in the areas which are
critical for the company, Ethiopia plastic share company use type of cost as a generic cost
classification for its product costing.

There are direct materials, direct labour and manufacturing overheads, for price build up purpose
it adds non-manufacturing cost such as administration and marketing expenses. The cost
classification systems used in the company are in line with the general definition for such
purposes.

4.3.1 Production Costs

The cost of production is comprised of direct material direct labour and production overhead.

1. Direct material costs

Direct materials are those materials and supplies which can be easily identified with the product
or job. A material may be considered as a direct change at one time and indirect or overhead
charge on another occasion on the basis, direct materials and distinguished from indirect material

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such as stationary, uniforms, cleaning and sanitation supplies etc. Ethiopia plastic share company
uses imported raw materials. The basic imported raw material include.
 Thermoplastics which include polyethylene, polychloride and polystyrene
 Anneal copper and colorants
 Additive and other fillers
 Other materials such as accessories for production of ball point pens, alcohol, and nylon
sack and poly propylene tube.
On the other hand materials, such as stationary uniforms, cleaning and sanitation materials, and
all materials which can not be traced to products are classified under indirect material with in
production overhead category.
2. Direct Labour Costs
Direct labour cost consist of salaries and wages of employees assigned to a particular product or
production unit of a factory. By contrast, the salaries and wages of employees who are not
directly involved in the production of goods (Eg. the salary of the production head and the
salaries and wages of the workers engaged in the work shop and the like are indirect labour cost
and therefore chargeable to production overhead costs. Thus to determine the actual cost of
direct labour a proper time attendance sheet should be maintained for each worker or crew and
the salaries and wages paid during a period of a week or month be calculated and charged to
specific production unit.

In the case of Ethiopia plastic share company labour (both permanent and some time temporary)
is involved in the production operations relation to film blowing blow molding, extrusion
injection molding .

3. Production overhead costs

These are costs which are not easily and economically identifiable with a product or a job.
Although such costs are difficult to identify with a product or a job many of them are easily
traceable to particular production or service units and could be charged to these units. Any
production cost not taken into account as a direct material or direct labour is included under
production overhead category. Some examples include rent, utilities, insurance, indirect wages.
Power indirect material, depreciation repair and maintenance, personnel service etc.

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4.3.1 Operating Expense
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 Direct labour Manufacturing overhead
- All costs to bring - Salaries and Wage - Salaries and
- Allowance Wages
The materials ex-sture - Overtime - Allowance
- Insurance labour - Utilities and Expense
- Medical - Depreciation
- Provident fund - Medical
-Canteen and - Insurance
Cafeteria
- Others

Figure 3.1 Product Costs

3.1 Cost Accumulation at
Ethiopia plastic share Company

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3.1.1 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 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 diagrham shows the flow of
costs in different stages in the company.

Imported Local purchase

Materials

A. Purchasing Suppliers Import Inland costs Suppliers

costs costs cost
- Invoice -Insurance -Transport -Invoice
- Bank charges - Unloading

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 - Transit
- Part charge
- documents

Receiving section
Good receiving note Copy to finance

B. Production
Material Raw material
Request Stores

-Stores Requisition Store issue Copy to finance

Preparation Voucher

Mixed raw materials

Production Copy to finance

(Finished goods
Transfer Voucher)
Finished goods store
C. Marketing

SalesRequest for delivery

section 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

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

4.4., manufacturing Overhead Costs

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

Summary of manufacturing overhead cost

No Types of expenses Amount

1 Salaries and wages 227,00
2 Indirect materials 190,000
3 Electricity 250,000
4 Depreciation 930,000
5 Uniform and outfits 18,000
6 Repair and maintenance 600,000
7 Water & others 30,000
Total 2,245,000
Source: Secondary data

4.5., 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

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 Material Control -xxx
Manufacturing overhead control - xxx
 Scrap is reprocessed
Work in process - xxx
Material control – xxx

4.6., Standard Costing

Standard costing is one of the variance that shows the costing system of an organization whose
activities consists of a series of common 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 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.

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 CHAPTER FIVE

5.1.. Summary of findings Conclusion and Recommendation

These chapter summarizes the main finds of the study and forwards recommendations based on
the conclusion.
5.2. 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 labour,
manufacturing overhead and other non-manufacturing costs. This type of classification suites
most of the general financial reporting.

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

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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.
5.3., 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 include 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.

 The accounting treatment used in the receipt of the items in to stores in good
receiving note debited work in process inventory as production cost for raw materials and
similarly the entry used in direct labour cost accumulation is direct labour expense to be debited
instead of cost, the practical is different from it’s theoretical part of the cost accounting system in
Ethiopia plastic share company.

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 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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