MEKANE YESUS MANAGEMENT AND LEADERSHIP COLLEGE

ASSESSMENT OF COST ACCOUNTING SYSTEM OF KOTEBE METAL TOOLS

FACTORY
BSC RESEARCH THESIS
By
1.Tigist Regasa Olana………………..…. AFR 97/19

Super Visor
Ayelu Beyene
 CONTENTS
 Introduction

 Statement of the problem

 Research Objective

 Significance of the study

 Scope of the study

 Research gap

 Methodology

 Data presentation, Analysis, and Interpretation

 Conclusion and Recommendation

 INTRODUCTION
Background of the study
Nowadays organizations give due attention to cost
accounting, so technological innovation changes the
manufacturing industry in a dynamic way
Cost accounting is the process of accumulating the costs of a
manufacturing process and identifying them with the units
produced
Generally, the cost accounting system when applied to the
cost-finding objective designed to accumulate the
manufacturing costs and assign them to the units produced
and the flow of these costs through manufacturing accounts
 Continued……….
Background of the organization
Kotebe Metal Tools Factory (KMTF) ;-
is located in north east part of Addis Ababa, a woreda 28 kebele 02
Was established in 1969 G.C by initial capital of 2,000,000 birr
By mutual agreement of Ethio-Poland government
 produced
Stone Hammer, Hing, pick axe, Sickles, Shovel chisel and etc…
The recent status of the factory has 205 workers of those female
workers are 30 and the categorizes of workers according to their
profession
The performance of the factory activity is based on corporate plan,
which is prepared at the beginning of the year
 STATEMENT OF THE PROBLEM
Technological advancement and growing need of mankind has been
the prime cause for to days’ dynamic business environment
so the need for consistent recording in business enterprises arose
Cost accounting especially for manufacturing companies, is the key
factor for achieving the desired profit since cost of raw materials, is
the major expense
The company doesn’t properly apply the cost accounting system leads
an organization to problems
It is to say that how an organization can plan its operation without
knowing cost centers and costs are more and how to bring down
improper cost increments for certain cost objects (may be machines
products etc.)
 OJECTIVE OF STUDY
General objectives
The main objective of this research is to to investigate whether
the organization under consideration is using cost accounting
system in its management in accordance with standard and
theories of cost accounting and to investigate an over view of
cost accounting practices
 Continued……….
 Specific objectives
1. To examine the system and classification of cost
2. Study the methods, the organization uses to allocate costs
from one departments to another.
3. How to determine the cost of product
4. Investigate the accounting treatment of or spoilage, scraps
and management of wastages used by the factory.
5. To study the standard costing system and variance analysis
methods employed by the firm for control purpose
6. Examine how to control labor and materials costs
 SIGNIFICANCE OF THE STUDY

 This research paper has the following importance, first, the output of
the study would help the factory to correct its problems

 Second, in doing the research, the student researcher would develop

research skills and finally, the research paper can be used as a base for
further research

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 SCOPE THE STUDY

The study would cover as much as possible all cost accounting system
which is focused on KMTF the cost accounting is the back bone for
the survival of the company dealing with cost analysis
Then the research paper is specifically designed to assess the cost
department of the company. And finally recommendation were fore
warded about the effectiveness of the company based on the findings
on the data analysis part
 RESEARCH GAP
The Followings are the research gaps for the present study

I. Difficult to inspect all aspects of the company

II. Lack of transparency in the employees by misunderstanding of the objective

III. The major problem of the study is some head of the department were not
willing to give full in formation

IV. Time and financial constraint to go every day and collected the data in detail
 METHDOLOGY
This refers to be the variables over which the data for this study would be collected and the
method that would be used in data collection, analysis and interpretation
 Research area
This study would be conducted on cost accounting system of Kotebe metal tools factory
located in north east Addis Ababa.
 Source of data
Source of data selection to conduct the study is important because the more valid the
information source
The reliable would be the information receive, which leads to accounts and good
communication so the organization
 Continued……….
 Methods of data collection

To understand the study, the researcher would use primary and secondary data
collection tools

The primary data would be collected from primary source, unstructured in depth
interview. There would be filled by respondents from different departments in
cost and budget department and other related finance sectors secondary source

The secondary source of data would include different document and related
reports through investigations and verification of balance related transaction
based on departmental activity of the organization
 Continued……….
Sample and sampling techniques
The sample size of the study was six. They are the cost and
budget department and other department related to cost accounting
used for different purposes. For this study the researcher was used
judgment sampling of non – probability technique
Method of data analysis
The collected data would be processed, analyzed and interpreted
to report the result of researcher finding of the selected
organization
The data analysis begins by editing and classifying the collected
data in more meaning full and relevant information to the study by
attached documents (if any) as it is appropriate in conducting the
study
 Continued……….
Data editing means the process of examining collected data
identify errors and omissions
The data analysis begins by editing and classifying the
collected data in more meaning full and relevant information
to the study by attached documents (if any) as it is
appropriate in conducting the study
To data classification, the gathered data are arranging and
grouped in to similar categories and generalize the data in
order to facilitate the study
The interpreted data would be summarized and concluded in
to meaningful way that can be understood by any concerned
body
 DATA PRESENTATION, ANALYSIS AND
INTERPRETATION
The result and discussion parts of the research was analyzed based
on the data collected through unstructured interview with some
supporting documentary evidence such as the past year’s costs data
The result of the study is based on a number of factors Difficult to
inspect all aspects of the company
These factors include
 costing system, accounting for major elements of manufacturing costs,
flow of costs accounting treatment in spoilage, scrap, defective goods,
standard costing system, variance analysis and finally cost control
mechanisms
 Continued……….
Costing system
According to all the respondents replied that the type of
costing of a product adopted in the factory is job order
costing. By this reason, the factory products are produced in
a
batch
KMTF used manual accounting system. In manual
accounting system, there is a separate sheet of paper for each
job
The amount of materials, labor and over ahead required to
complete the process are manually posted to the job order
sheet
 Continued……….
Flow of costs in the factory
 Continued……….
1. Direct Materials
According to all the respondents replied that the factory is
incurred the huge amount for direct materials purchase

It includes;
 the cost of raw materials insurance, freight in cost and duty on
international shipments
According to the results obtained from the study materials
are acquired by following the purchasing procedures
 Continued……….
2.Direct Labor
The person who works directly with the raw materials in converting them to
finished goods based on the study, the salaries and wages of employees of the
factory is considered as direct labor
In the production department there are five sub departments such as foreign,
machine shop, sickles Harding and grinding and painting
In the KMTF labor costs are computed at each product but not at each cost center

Each of the type of product has sheet for recording the daily labors hours worked
 Continued……….
3. Manufacturing overhead

According to the study, overhead was found that the factory

(KMTF) was established the factory overhead rate for each product
to allocate the overhead costs for each type of products

 For example, the stone hammer 2000%, for hing 6 1000%, for
speed harrar 2000%, for pick axe 2kg 2000% for sickles 1000%
and soon. The percentage indicate the allocation of factory
overhead cost to individual jobs
 Continued……….
Accounting treatment for scrap and defective unit

This table indicate the scrap sales of the three years of the
factory. The factory is accumulated these scrap in store and
sold them at the end of the year
According to the study, there is a defective unit occurred
every year, the quantity vary year to year
 Continued……….
The theoretical aspect of the scrap does not state like the
KMTF treated
 According to theoretical aspect the treatment of scrap is
identify scrap with individual jobs and then the value of scrap
is withdrawn from the total cost of jobs
From this the factory got some benefits, This benefits not
deducted from the total cost of each product
there is a defective unit occurred every year, the quantity
vary year to year
The table indicate annually defective and modified production report. The above table indicate that each of
the product have a defective unit expect the sickles. But they are not more according to the produced
products quantity
 Continued……….
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 respective operation.

 According to the respondents and from self-assessment of documents of the factory, they
use standard consisting 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 detects and controlled
at the source

 According to the cost and management professions, standard must be updated periodically to reflect
changes in the structure of a production process but the Kotebe metal tools factory standards are not
updated periodically to reflect changes
 Continued……….
Variance analysis

Variance is the different between the standard stated and the actual results.
Predetermined cost figures, results in a standard cost with which the actual cost
may be compared to determine the extent of variance
 According to the results obtained from the study are different accountable
bodies when variance occurs and in addition to this the standard cost also play
some valuable role in variance of each cost.
 The standard cost still does not revise. Do not take immediate corrective
actions and by this reason the decision made will not be appropriate and
 This table indicated the budget production variance of the 2013 The cost manger identifies the
reason for this variance because it helps mangers take corrective action that will be
incorporated in future budgets.
 the factory mainly focusses on one type of variance that is labor efficiency variance.
Continued……….
 As indicated in the above pie chart
 50% of the causes of labor efficiency
variance is personal difference
 33% of the causes is due to failure to
maintain machine and
 17% which is negligence of the
worker to work
 As the result of the study indicates
that most of the labor efficiency
variance is due to personal difference
unequal in skill knowledge and
speed to manipulate
 Continued……….
 Cost controlling mechanism

Cost control is critical for any organization in order to achieve the desired
profit our lined in the budget.

According to the study, the Kotebe metal tools factory used standard
costing system to control costs of factory. Once costs have been planned,
the next step, is to see the actual costs are inconformity with the planned
costs.

 It is in this context that management needs cost data so that responsibility

for incurrence of costs can be identified.
CONCLUSIONS AND RECOMMENDATIONS
Conclusion
The basis of the data collected from respondents and more or less in
formation obtained from a survey of documents
The study has come up with the following findings presented kotebe metal
tools factory uses job costing system because of the following basic
characteristic features
Production, is undertaken after obtaining customer order
Each order is different and suited to the requirement of the customer
Production cycle is usually short period
Different types of products produced
Cost accumulation by. job specified number of units
Unit cost is computed by cost accumulated by job divided by units in the job
 Continued……….
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 ongoing operating cost and special decision making
The factory has included most of the cost accounting system and practices
Nevertheless; the researcher needs to recommend the following are
1. The factory should be revised the standard costing because the factory used is
not up dated to the current situation.
2. The factory should be given incentive to motivate and training to develop
skills employee at the work place and outside the work place like seminars,
workshops etc.
3. The factory should adjust the treatment of scrap because the treatment of scrap
is not identify scrap with individuals jobs and deduct from the individual
product costs.