TABLE OF CONTENT

Contents pages

Acknowledgment …………………………………………………………………………… i

Abstract…………………………………………………………………………………………..ii

CHAPTER ONE………………………………………………………………………………….

INTRODUCTION……………………………………………………………………………

1.1. Background of the study………………………………………………

1.2. Statement of the problem……………………………………………..
1.3. Objective of the study………………………………………………………
1.3.1. General objective…………………………………………………..
1.3.2. Specific objective……………………………………………………
1.4. Basic research questions……………………………………………………….
1.5. Significance of the study…………………………………………………
1.6. Scope and limitation of the study…………………………………….
1.6.1. Scope of the research………………………………………………..
1.6.2. Limitation of the research………………………………………..
1.7. Organization of the study

CHAPTER TWO

2. LITRATURE REVIEW..........................................................................

2.1 Definition of cost, costing and cost accounting.....................

2.2 Cost object

2.3 Cost driver

2.4 Advantages of cost accounting

2.5 Cost management

2.6 Classifications of cost

2.7 Manufacturing costs

2.8 Non-manufacturing costs

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2.9 Job orde and process costing system

2.10 Similarities and difference between

process and job order costing.................................

2.11 Costing system.......................................................

2.12 Method of costing...................................................

2.14 Techniques of costing..........................................

2.15 Empirical Review ...............................................

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 Acknowledgment

First of all we would like to praise the almighty of GOD who helped us from the
inception to this end. Second and for most, sincere gratitude and appreciation goes
to our Advisor Dereje. G for his detailed, thoughtful comment and suggestion in
developing the research paper. Thirdly, we would like to thank all the members of
the Unity University Library staff for their endurance in searching for materials
requested and prevision of these materials write developing the paper. And also we
would like to thanks our families for their financial support.

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 ABSTRACT

The general objective of the study was to assesses the cost accounting practice of
Adama steel factory. To achieve this objective, the study used both quantitative and
qualitative data types to describe the extent of cost accounting practice, the purpose
of the cost accounting practice of the factory. The study used both primary and
secondary data sources to collect relevant data by using questionnaires (Close and
open ended) and interview for employees. The study used non- probability sampling
techniques to collect data. The primary data were collected using questionnaires and
interview from manager and employees. The secondary data were collected from
written materials. Beside there, the findings of the study give the crucial advantage
for other study who want to conduct a detailed study regarding the issues based on
the finding. The basic Problem is there is no proper overhead allocation in the
company.

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5
CHAPTER ONE

1. NTRODUCTION
This chapter aims to provide a general introduction includes background of the study,
statement of the problem, major research questions, Objective of the study, significance of the
study, scope and limitation, organization of the study.

1.1Background of the study

Assessment of costing system is major issue for all organizations, whatever its mission is every
organization has a set of objective, management of this organizations will require information
for planning how to achieve these objectives and evaluate their performance.

Costing system helps the management for carrying out efficiently its functions i.e planning,
budgeting, decision making, organizing, controlling pricing and evaluation of business
operation. Cost accounting is the art of classifying recording and appropriate allocation of
expenditure for determination of cost of products or services and for the presentation of
suitably arrange data for purposes of control and guidance of management.

Cost accounting is concerned with the transformation of resources. As materials are moved
from one stage to another in the manufacturing process they collect costs workers spend time
on converting the materials and use one or more fixed asset. System and records are vital parts
of tracing the responsibility for performance and cost

Cost accounting is a form of managerial accounting that aims to capture a company's total cost
of production by assessing the variable costs of each step of production as well as fixed costs,
such as a lease expense. Cost accounting is not GAAP-compliant, and can only be used for
internal purposes. Cost accounting is used internally by management in order to make fully
informed business decisions. Unlike financial accounting, which provides information to
external financial statement users, cost accounting is not required to adhere to set standards
and can be flexible to meet the particular needs of management. As such, cost accounting
cannot be used on official financial statements and is not GAAP-compliant.

Cost accounting considers all input costs associated with production, including both variable
and fixed costs. Types of cost accounting include standard costing, activity-based costing, lean
accounting, and marginal costing. Cost accounting is used by a company's internal management
team to identify all variable and fixed costs associated with the production process. It will first
measure and record these costs individually, then compare input costs to output results to aid
in measuring financial performance and making future business decisions
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1.2Statements of the problem
Costing system can help management by providing reliable, competent and relevant
information and data to measure performance, make decision, evaluate processes and reduce
risks. Good cost accounting practice helps adama steel factory to maximize its profit and stay a
head on the internationally highly competitive steel industry due to the above mentioned uses
of cost accounting. But problems like not choosing the appropriate cost accounting system, not
using cost principle appropriately, lack of knowledge and willingness to practice cost accounting
system, can be seen in adama steel factory.

In order to decrease problems from bad cost accounting practice, the company should use
appropriate cost accounting principles and employs should be told about cost accounting and
its uses. Generally, the research will assess about problems of cost accounting practice and
recommendation.

1.3Basic research questions

 What type of cost system is used by the company?
 Does the factory use over head cost allocation?
 In terms of valuable information is the costing system strong or weak?
 Does the factory have cost standard related with cost?

1.4 Objectives of the study

1.4.1 General objective

The general objective of the proposed study was to assess the cost accounting practice of
Adama steel factory.

1.4.2 Specific objectives

To achieve the general objective, the following are sets of specific objectives that will be
addressed.

o To identify the types of costing system used by the company.

o To examine how overhead are allocated.
o To identify system constraints and provide some recommendation.
o Examine if the factory have cost standards.

1.5 Significance of study

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The study has the following importance. First in doing the research the student researcher
improves his/her research skill. Second the recommendation given at the end will help the
organization to improve its inefficiencies and finally, the research work will serve as starting
point for further research on the same topic.

1.6 scope and limitation of the Research

1.6.1. Scope of the research

The study would cover as much as possible all cost accounting practice which is focused Adama
steel factory. Then the research paper is specifically designed to asses the cost accounting
practice in the company. And finally recommendation were forwarded about the effectiveness
of the company based on the findings on the data analysis part.

1.7.2. Limitation of the research

The limitation confronted the researchers were, shortage of time not to assess all employees
response to give necessary data and also lack of recent books in the library and lack of
adequate information.

1.8 organization of study

The study would be organized into five chapters. The first chapter deals with the problem and
its approach. The second chapter concerned with presenting the review of related literature.
The third chapter presented methodology of the study, such as data type, data source, method
of collection, target population, sample size and sample technique and data analysis and
presentation. The fourth chapter for treat the analysis and presents of the data collected.
Finally, the fifth chapter would bring to an end of the study with summary, conclusion and
recommendation.

KEY TERM DEFINITION

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Chapter two

2. Literature Review

2.1 Definition of cost, costing and cost accounting

Cost is a sacrifice or giving up of resources for particular purpose. For many organization, the
largest single cost is the cost of labor The resource the organization gives up is cash and
purpose is to pay laborers for the activities they perform in producing products or services. Cost
can be of anything which is measurable interms of money (for example dollars, yen, or euros)
that an organization must pay for good and services. (1.Harngren and etal, 2005)

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.
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)

Cost is a term whereas costing is a process of determining the cost. It may be called a technique
for ascertaining the cost of production of any product or service in the business organization.

Cost accounting is the technique and process of ascertainment of cost (London). It is asset of
procedures and techniques for determining the cost of a product and of the various activities
involved in its manufacture and sale. It helps in planning and measuring performance. It
involves application of costing and cost accounting principles, methods and techniques to the
science, art and practice of cost control and the ascertainment of profitability. It includes the
presentation of information for the purpose of managerial decision-making. It can also be
defined as the classification, recording and appropriate allocation of expenditure for the
determination of products or services.(Bhabatosh Banerjee, 1997) 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 especially in manufacturing organization.

2.2 Cost object

Is any item for which costs are being separately measured. In manufacturing company, the cost
object is the unit of finished goods manufactured.

2.3 Cost driver

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Is any factor that causes a change in the total cost of producing goods or services. That is a
change in the cost driver will cause a change in the level of the cost of a related cost object.

It can be any measurable Input that affect the costs of a company, either directly or indirectly.
For example, the following are some of the cost drivers used for each types of cost drivers used
for each types of costs mentioned.

 Length of time of call for telephone cost

 Metric cube of water consumed for water cost-
 Unit sold for cost of goods sold.
 Mile driven for transport cost

2.4 Advantages of cost accounting

The principal advantages of cost accounting are:

1. Reveals profitable and unprofitable activities. A system of cost accounting reveals

profitable and unprofitable activities so that steps may be taken to reduce or eliminate
wastages and inefficiencies accounting in any form such as idle time, under-utilization of
plant capacity, spoilage of materials, etc.
2. Helps in cost control cost accounting helps in controlling cost with special techniques
like standard costing budgetary control.
3. Helps in decision making. It supplies suitable cost data and other related information for
decision making, such as introduction of new product line, replacement of old
machinery with an automatic plant, make or buy, etc.
4. Guide in fixing selling prices. Cost is one of the most important factors to be considered
while fixing prices. A system of cost accounting guides the management in the fixation
of selling prices particularly during depression period when prices may have to be fixed
below cost.
5. Helps in inventory control. Perpetual inventory system, which is an integral part of cost
accounting, helps in the preparation of interim profit and loss account.
6. Aids in formulating policies. Costing provides such information as enables the
management to formulate production and pricing policies and preparing estimates of
contracts and tenders.
7. Helps in cost reduction. It helps in the introduction of a cost reduction program and
finding out new and improved ways to reduce costs.
8. Reveals idle capacity. A concern may not be working to full capacity due to reasons such
as shortage of demand, machine break down or other bottlenecks in production. A cost

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 accounting system can easily work out the cost of idle capacity so that management
may take immediate steps to improve the position.
9. Checks the accuracy of financial accounts with the help of reconciliation between the
two at the end of the accounting period.

2.5 Cost management

Cost management is the essence of cost accounting. Cost management refers to the planning
and execution of activities both in the short run and long run to control costs. Profoundly, cost
management is about cost reduction but it is not confined to it alone. Sometimes managers
may incur additional costs in order to increase their future sales. This activity is also a cost
management. It is the set of actions that a manager takes to satisfy customers while
continuously reducing and controlling Cost.

Cost reduction efforts frequently focus on two key areas:

 Doing only value adding activities, that is, those activities that customers. perceive as
adding value to the product or service they purchase
 Efficiently managing the use of the cost drivers in the value adding activities.

2.6 Classifications of Cost

There are several standard cost classifications and each classification has its own unique
terminology. In this subunit, we present a comprehensive list of ways costs may be grouped,
the concepts underlying each, and the terminology commonly used. Remember that the same
cost may be included in several or in all of the following classifications.

Classification by cost Behavior

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

Fixed cost - remains constant in amount as volume of production or sales changes. Straight-line
depreciation on a plant asset is an example of a fixed cost. The amount of depreciation is the
same regardless of the number of units produced……. (Nagy and Vander back, 1996)

Variable costs – are costs that vary proportionately in total as the volume of production or
sales changes. For example, if it takes Br. 100 of lumber to make one unit of table and if five
units are produced, the total cost of the lumber is Br.50. The total variable cost increases in
proportion with the number of unit's produced, but the cost of each unit remains the same.
Mixed cost - are those which are partially fixed and partially variable. For example, telephone
expenses include a fixed portion of annual charge plus variable according to calls; thus total
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telephone expenses are semi-variable. Other examples of such costs are depreciation, repairs
and maintenance of building and plant etc. (Jain and Narang, 1997)

Time period for which the cost is computed

A, historical costs

Historical costs are those that were incurred in the past period.

B, Budget cost

Budget costs are those that are expected to the incurred in a future period (2 nd edition
cherrington).

Classification by management Function.

An organization may be separated into functional areas. A manufacturing company's functional

areas generally include manufacturing, marketing, and general administration. One individual,
such as a vice president of manufacturing or a vice president of marketing, has primary
responsibility for a specific functional area. To evaluate the effectiveness of the functional area
and the individual in charge of it, costs also must be grouped by functional area as follows.

Manufacturing Costs - include costs from the acquisition of raw materials through production,
until the product is turned over to the marketing division to be sold, Manufacturing costs
include the cost of the raw materials, payroll costs for people working on the product, and
incidental costs such as taxes, power, depreciation, and repairs associated with manufacturing
the equipment

Selling Costs - are all costs associated with marketing and selling a product. They include all
costs incurred by the marketing division from the time the manufacturing process is complete
until the product is delivered to the customer. These costs include advertising, promotional
offers, freight to deliver the product, and warehouse costs while the product is waiting to be
sold (Arora, 2003)

Administrative Costs - are all costs associated with the management of the company and
include expenditures for accounting, legal, and administrative activities. Interest costs are also
included among administrative costs

Classification by Accounting Treatment

The alternatives in accounting for a cost are to expense it or to capitalize it.

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 Periodic Costs - are costs that are expensed in the period in which they are incurred. Periodic
costs possess no future benefit and are generally associated with a non manufacturing area of
the business. Examples of periodic costs include advertising Interest, president's salary and
sales commissions, (Jain and Narang, 1997)

Product Costs - Consist of all costs associated with the manufacturing function of the business.
They include materials, labor, and other factory overhead costs associated with assembling and
processing the units Because the company still holds the product and its usefulness has not yet
expired

Classification by traceability to Products

From traceability point of view, cost is divided in to direct and Indirect cost:

Direct Cost: is a cost that can be economically traced to a single unit of finished product. For
example; direct material & direct labor are direct costs. (Nagy and Vander back, 1996)

Indirect Cost: is one that is not directly traceable to the manufactured Product .It is associated
with the manufacture of two or more units of finished product, or is an immaterial cost that
cannot be economically traced to single units of finished product. For example: Cost of
electricity, Depreciation of equipment, indirect labor, indirect material, Cost of different
utilities, Cost of repair and maintenance, Insurance for the factory are indirect costs. .(Jain and
Narang, 1997) A comparison of the labor cost of an assembly worker and a repair person in a
cabinet shop will illustrate the difference between a direct and an indirect cost. The assembly
worker's salary is typically classified as a direct cost because, it is a significant portion of the
cabinet's total cost and because it is easy to trace the assembly worker's efforts to a particular
set of cabinets. The machine repair person's salary would probably be classified as an indirect
cost because; it is difficult or impossible to trace that individual's efforts to a unit of output. The
repairperson is responsible for keeping all machines running properly. Since he or she work on
several machines and the machines work on several different cabinets each day, we cannot
trace this person's salary to a particular set of cabinets. The lack of traceability requires that it
should be classified as an indirect cost. The economics of tracing a cost to a particular unit of
finished product is an important distinction between direct costs and indirect costs. Take a
table that requires a few screws and a little glue to complete the assembly. Both of these items
can be traced to a particular unit of finished product and would, therefore, qualify as direct
costs. However, these items are usually classified as indirect costs if their amounts are
immaterial when compared to the other materials going into the product. Also, the cost
involved in tracing and LL recording the items as direct costs would be greater than the benefit
of having that information.

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Classification by decision Significance

A decision involves making choices among alternative courses of action. The decision maker
generally collects cost information to assist in making the decision.

Relevant cost is future costs that differ with the various decision alternatives. They are costs
that make a difference in a decision-making process.

Irrelevant Costs do not relate to any of the decision alternatives, are historical in nature or are
the same under all decision alternatives. Irrelevant costs are generally excluded from the
analysis. Cherrington, 1998).

Classification by managerial Influence

Managerial influence refers to the ability of a manager to control a particular cost. Remember
that all costs are controlled by someone at some level in the organization if the time period is
long enough. However, when we see for a particular manager at a particular level in the
organization and for a short period of time, there are some costs that can be influenced and
some that cannot.

Controllable costs are subject to significant influence by a particular manager within the time
period under consideration.

Uncontrollable costs are those costs over which a given manager does not have a significant
influence. (Hilton, 1999)

Classification by planning and control

Under this category, cost can be classified as

1. Budgeted cost

Budgeted cost are management's operating cost expressed in quantitative terms, such as unit
of production and related costs. After factory overhead costs have been classified as either
fixed or variable, budgeted cost can be prepared for expected levels of production. (Nagy and
Vander back. 1996)

2. Standard cost

A standard cost is a carefully developed cost per unit that should be attained. It is often
synonymous with the expected cost, but some companies intentionally set standards above or
below expected casts to create desired incentives. (Horngren, Sundem and Stratton, 2005)

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Other Cost Classifications

Several other cost classifications are frequently used in discussing cost accounting and
management decisions. Their primary usefulness is in helping to place correct perspective of
the potential benefit of a possible course of action. These classifications include marginal costs,
out of pocket costs, sunk costs, and opportunity costs.

Marginal Costs, also called incremental costs, are the costs that are associated with the next
unit or the next project. The tem marginal cost is widely used in economics to refer to the
added cost associated with the production of an additional unit of output. (Horngren and etal,
2005)

One- of Pocket Cost: is a cost that must be met with a current expenditure generally an out of
pocket cost is a cash expenditure associated with a particular decision alternative. (Hilton,
1999)

Sunk Costs; are defined as past costs that have already been incurred. Because Sunk costs are
historical costs, they are generally irrelevant to decisions affecting the current or future use of
the asset.

Opportunity Cost: is defined as the cost or value of an opportunity forgone when one course of
action is chosen over another. opportunity cost is not an out-of pocket cost, or even a future
cost associated with the selected alternative, but represents the lost opportunity asšociated
with each of the alternatives that are rejected..(Hlilton, 1997)

2.7.Manufacturing Costs

Accounting for manufacturing process has the finished products as the primary cost object. The
cost accounting system applied to the cost object is designed to accumulate the manufacturing
cost and assign them to the units produced. We will first identify the terminology used for
different types of manufacturing costs and then illustrate how they are combined in to a
statement of cost of goods manufactured. Product costs are classified for accounting purpose in
to direct material, direct labor and indirect manufacturing cost. The criteria used for the
classification are the type of cost traceability to particular units of finished product and
materiality.

Direct Material: Product costs that relates to the use of raw material and supplies must be
identified as either direct material or indirect material. direct material includes the raw material
component that can be physically identified with or traced to the finished product. It is
distinguished from indirect material by the ability to identify it economically with finished
products. Indirect material lacks traceability to the finished product and is included as an
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element of indirect manufacturing costs. The type of manufacturing process and the products
being produced must be identified to evaluate whether a raw material input is direct or
indirect. For example, paper used in a printing shop would be classified as direct material
because the paper is a significant part of each printing job and can easily be identified with the
finished product. However, paper used in a glass factory to pack around the finished product
would probably be classified as indirect material. Here, the paper is an insignificant part of the
finished product, and it is not economically feasible to identify the quantity and cost of the
paper used with each product. Other example of direct materials includes wheat in a flour mill,
malt in a beer factory, and lumber in manufacturing wooden tables.

Direct Labor: salaries and wages properly classified as product cost must be separated into
direct labor or indirect labor for accounting purposes. Direct labor includes the wage of
employees who work directly on the product and whose efforts can economically be traced to a
particular unit. The wage paid to a laborer who will cut and polish lumber and assemble it to a
table is a direct labor cost for the table. But the salary of a supervisor who will oversee the
production process of the different products in the factory is an in direct cost as he will not be
directly involved in the production process. (Frigo,1986).

Indirect Manufacturing Costs: All manufacturing costs other than direct materials and direct
labor are classified as indirect manufacturing costs. There are several other titles commonly
used to describe this group of manufacturing costs, including factory overhead, manufacturing
overhead or factory burden.

The followings are some of the manufacturing overhead costs for a furniture manufacturing
company

1. Indirect materials, such as glue, nails, screws

2. Indirect labor, such as supervisor's salary and Janitorial services.

3. Taxes on manufacturing facilities.

4. Utilities for the manufacturing process.

5. Depreciation on manufacturing faculties

2.8. Non-Manufacturing Cost

Many other functional cost classifications are used besides manufacturing costs. Four of the
most important ones are: - (1) Merchandise costs, (2) Marketing costs,

6) Administrative costs, (4) Research and development costs,

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1. Merchandise Cost

Merchandise costs are the costs incurred by retailers and wholesale firms to acquire
merchandise for resale. Merchandise costs include the purchase cost of the goods plus
transportation cost. (Hilton, 1997)

2. Marketing Cost

Marketing costs are those required to obtain customer order and to provide the Customer with
the finished product. These include advertising, sales commission, shipping and building
occupancy costs among others. (Davidson. etal, 1988)

Marketing cost include the cost of selling goods or services and the cost of distribution. Selling
costs (order-getting costs) include salaries, commissions, travel costs of sales personnel and the
cost of advertising and promotion. Distribution cost (order filling costs) refers to the cost of
storing, handling and shipping finished product. (Hilton, 1999)

3. Administrative Cost

Administrative costs are those required to manage the organization, including executive and
clerical salaries and to provide staff support, such as legal, data processing and accounting
services. (Davidson. etal, 1988) Administrative cost refers to all costs of running the
organization as a whole. The salaries of top-management personnel and the costs of the
accounting. Legal and public relation activities are example of administrative cost.

4. Research and Development Cost

It includes all costs of developing new product and services. Such costs are becoming
increasingly important as international competition increases and as high-technology firms
make up a growing segment of the economy. The cost of running laboratories, building
prototypes of new products and testing new products are all classified as research and
development costs. (Hilton, 1997)

2.9. Job Order and Process Costing Systems

Manufacturers can use two basic accounting systems; general accounting system, and cost
accounting system. A general accounting system is the logical extension of accounting for
merchandising firms, and uses the periodic inventory system. However, since managers require
frequent accounting reports on manufacturing costs for decision making purpose, the use of
the general accounting system is very limited. Cost accounting system uses the perpetual
inventory system and it is most widely used, because it helps to gather information that are

17
needed in order to prepare periodic reports without physical counting and related cumbersome
tasks. The cost accounting system uses the perpetual inventory system, and achieves greater
accuracy in the determination of product cost than is possible with the general accounting
system. It also permits far more effective control by supplying data on costs incurred by each
manufacturing department or process and it provides a fairly accurate unit cost of
manufacturing each type of product that helps managers make good decisions timely. There
are two extremes of cost accounting systems for manufacturing operation- Job order costing
system and Process costing system.

A job order costing system provides a separate record of the cost of each particular batch of
product that passes through the factory. The system accumulates costs for a particular batch of
production, commonly referred to as a job. A job has a definite starting and completion time as
would, for example, the production of 10 pieces of windows, or 50 coffee tables. As the name
implies, job order means, the units are produced as per the order of a customer, each customer
order is different in terms of specification. A difference in specification means a difference in
quantity of inputs used. An individual job does not mean a single output; rather it means a
single order which can be just for stock that can be sold later to ready- made buyers. Whatever,
whether for customer or stock, jobs are not similar, and their costs are also different. In job
order costing system, costs are accumulated by job. For each job, the firm maintains a separate
job cost sheet, which is a record on which manufacturing costs of the job are accumulated In
job order costing, costs are accumulated by jobs, orders, contracts, or lots. (Cherington, 1998).

The key is that, the work is done to the customer's specifications. As a result, each job tends to
be different. For example, job order costing is used for construction projects, government
contracts, shipbuilding, automobile repair, printing jobs, wood furniture, office machines,
machine tools, and luggage Accumulating the cost of professional services such as lawyers,
doctors and CPA's also falls into this category. Process costing system is a costing system used
for manufacturing processes which produce a single product or single mix of products
continuously for an extended period of time. In process costing, costs are accumulated by
departments, operations, or processes. The work performed on each unit is standardized or
uniform where a continuous mass production or assembly operation is involved. For example,
process costing is used by companies that produce appliances, alcoholic beverages, tires, sugar,
breakfast cereals, leather, paint, coal, textiles, lumber, candy, coke, plastics, rubber, cigarettes,
shoes, typewriters, cement, gasoline, steel, baby foods, flour, glass, men's suits
pharmaceuticals and automobiles. Process costing is also used in meat packing and for public
utility services such as water, gas and electricity.

2.10. Similarities and Difference between Process and Job order Costing

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Firms producing distinct and unique products use job order costing system where as firms
producing similar or identical units use process-costing system. Process costing system
accumulate costs by departments for a period of time, just as a job order costing system
accumulate costs by jobs, and the total cost will be assigned to the units produced in that
period. Process costing system is product costing system which is applied when identical units
are produced in mass. Identical units are assumed to take the same amount of direct material,
direct labor & manufacturing overhead. These costs are accumulated over a period of time and
the total cost is assigned to units produced in the period the cost is accumulated In process
costing system, each unit is assumed to take equal amount of direct material, direct labor and
manufacturing overhead. The difference between job order and process costing system is, thus,
the extent of the averaging used to compute unit cost. In job order costing each job differs in
terms of material used, labor incurred, and manufacturing overhead. Hence, it is impossible to
assign the same cost for different jobs. On the contrary, identical units produced in mass take
equal amount of direct material, direct labor, and manufacturing overhead. Thus, the unit cost
can be found by dividing total cost by the number of units produced. (Horngre and etal, 1999)
When a firm produces identical lots of goods repetitively, maintaining a separate job cost sheet
would be unnecessarily expensive. The aggregate cost and the unit cost can be computed with
out a job cost sheet, thus saving the cost associated with producing such records. Costs are
accumulated by departments over a certain period and the unit cost can be found by dividing
the total cost to the units produced during that period. Process costing system fit among others
to, paint manufacturers; oil refineries, sugar refineries, and salt producers. The difference
between job order and process costing arise from two factors. The first is that, the flow of units
in process costing system is more or less continuous, and the second is that these units are
indistinguishable from one another. Under process costing, it makes no sense to try to identify
material, labor and overhead costs with a particular order from customers as we did in job
order costing system, since each order is just one of the many that are filled from a continuous
flow of virtually identical units from the production line. Under process costing, we accumulate
costs by department, rather than by order, and assign these costs equally to all units that pass
through the department during the period. A further difference between the two costing
system is that the job order cost sheet has no use in process costing, since the focal point of
that method is on department. Instead of using job order cost sheets, a document known as
cost of production report is prepared for each department in which work is done on products.
The production report serves several functions. It provides a summary of the number of units
moving through a department during a period, and it also provides a computation of unit costs.
In addition, it shows what costs were charged to the department and what disposition was
made of these costs. The department production report is a key document in process costing

19
system. The major difference between job order and process costing systems is summarized in
the table below.

Job order costing Process costing

Product costs are traced to the Product costs are traced to

product and recorded on each job's departments or processes.
individual job cost sheet.

Each department tracks its expenses Each department tracks its expenses,
and adds them to the job cost sheet. the number of units started or
As jobs move from one department transferred in, and the number of units
to another, the job cost sheet moves transferred to the next department.
to the next department as well.

Unit costs are computed using the Unit costs are computed using the
job cost sheet. departmental costs and equivalent
units produced.

Finished goods inventory includes Finished goods inventory is the

the products completed but not sold, number of units completed at the per
and all incomplete jobs are work in unit cost work in process inventory is
process inventory. the cost per unit and the equivalent
units remaining to be completed.

Hybrid Costing System: Product-costing systems must often be designed to fit the particular
characteristics of different production systems. Many production systems are a hybrid- they
have some features of customer-order manufacturing and other features of mass-production
manufacturing. Manufacturers of relatively wide variety of closely related standardized
products (for example televisions, dishwashers and washing machines) tend to use a hybrid-
costing system. A hybrid- costing system blends characteristics from both job-costing and
process costing systems. Job-costing and process-costing systems are best viewed as the ends
of a continuum.

2.11.Costing System
Costing systems may be based on historical costs alone or on a combination of standard costs
and historical costs. The latter are the actual costs incurred in respect of labor, material and
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expenses. On the other hand, the standard costs are predetermined costs set in advance of
actual production.

2.12.Method of Costing
The methods to be used for the ascertainments of cost of production differ from industry if
primarily depends on the manufacturing process and also on the method of measuring the
department and finished products. Basically there are eight method of costing, discussed briefly
as below:-

1. Job- order costing

Under this method, costs are collected and accumulated for each job work order or project
separately. Each job can be separately identified; so it becomes essential to analyses the cost
according to each job. (Jain and Narang, 1997) special This method "applies where work is
undertaken to customers requirements." Cost unit in job order costing is taken to be a job or
work order for which costs are separately collected and computed. A job, big or small,
comprises a specific quantity of a product or service to be provided as per customer's
specifications. Industries where this method is used include printing press, repair shops, interior
decorators, painters, etc. (Arora, 2003)

2. Contract costing

When the job is big and spread over long periods of time, the method of contract costing is
used. A separate account is kept for each individual contract. This method is used by builders,
civil engineering, contractors, constructional and mechanical engineering firms etc. (Jain and
Narang, 1997)

This costing is a variation of job costing and, therefore, principles of job costing apply to this
method. The difference between job and contract is that job is small and contract is big. It is
well said that a contract is a big job and a job is a small contract. The cost unit here is a
'contract' which is of a long duration and may continue over more than one financial year.
(Arora, 2003)

3. Batch costing

This is an extention of job costing. A batch may represent a number of small orders passed
through the factory in batch. Each batch is treated as unit of cost and separately costed. The
cost per unit is determined by dividing the cost of the batch by the number of units produced in
a batch. (Jain and Narang, 1997) Like contract costing, this is also a variation of job costing. In

21
this method, the cost of a batch or group of identical products is ascertained and therefore
each batch of products is a cost unit for which costs are ascertained. (Arora, 2003)

4. Process costing

This is suitable for industries where production is continuous, manufacturing is carried on by

distinct and well defined process, the finished product of one process becomes the raw
material of the subsequent process, different products with or without by-product are
produced simultaneously at the same process and products produced during a particular
process exactly identical. (Jain and Narang, 1997)

5. (One) Operation (unit or output) costing

This method of cost ascertainment is used when production is uniform and consists of a single
or two or three varieties of the same product. Where the product is produced in different
grades, costs are ascertained grade-wise. (Arora, 2003)

This is suitable for industries where manufacture is continuous and units are identical. This
method is applied in industries like mines, quarrels, oil drilling, breweries, cement works, brick
works, etc.

6. Service /operating/ costing

This is suitable for industries which render service as distinct from those which manufacture
goods. This method is used to ascertain the cost of services rendered. There is usually a
compound unit in such undertaking.

7. Multiple operations costing

This method of manufacture consists of a number of distinct operations. It refers to conversion

cost i.e., cost of converting the raw materials in to finished goods. The method takes in to
consideration the rejections in each operation for calculating in put units and cost.

8. Multiple costing

It represents the application of more than one method of costing in respect of the some
product. This is suitable for industries where a number of components parts are separately
produced and subsequently assembled in to a final product. (Jain and Narang, 1997)

2.13.Techniques of Costing
The main types of costing are discussed in the following

22
1. Uniform costing

It is the use of some costing principles and /practices by several undertaking for common
control or comparison of costs. This is not a separate technique or method of costing like
standard costing and process costing. It is simply denotes a situation in which a number of firms
adopt a uniform set of costing principle. It has been defined by CIMA London as "the use by
several undertakings of the same costing principles and/or practices." (Arora, 2003)

2.Marginal costing

It is the ascertainment of marginal costs by differentiating between fixed and variable costs. It is
used to ascertain the effect of changes in volume or types of output on profit. (Jain and Narang,
1997)

3. Standard costing

This is a very valuable technique to control the cost. In this technique, standard cost is
predetermined as target of performance and actual performance is measured against the
standard. The differences between standard and actual costs are analyzed to know the reasons
for the difference so that corrective actions may be taken. (Arora, 2003)

A comparison is made of the actual cost with a pre-arranged standard and the cost of any
deviation (called variable) is analyzed by causes. This permits the management to investigate
the reasons for these variables and to take suitable corrective action.

4. Historical costing

It is ascertainment of costs after they have been incurred. It aims at ascertaining costs actually
incurred on work done in the past. It has a limited utility, through comparison of costs over
different periods may yield good results.

5. Direct costing

It is the practice of charging all direct costs, variables and some fixed costs relating to
operations, processes or products leaving all other costs to be written off against profits in
which they arise. The cost of a manufactured product includes only the costs that vary directly
with volume: direct materials, direct labor, and variable factory overhead. This method is also
referred to as variable costing. (Nagy and Vander back, 1996)

6. Absorption costing

23
It is the practice of charging of all costs, both variable and fixed to operation, processes or
products. This differs from marginal costing where fixed costs are excluded. (Jain and Narang,
1997) Under this method, both fixed and variable manufacturing costs are assigned to the
product and no particular attention is given to classifying the costs as either fixed or variable.
(Nagy and Vander back, 1996)

2.14.Cost Accumulation and cost Assignment

A costing system typically account for costs in two basic stages, accumulation followed by
assignment. Cost accumulation is the collection of cost data in some organized means of
accounting system and cost assignment is a general term that encompass both

(1) tracing accumulated cost that have direct relationship to the cost object and

(2) allocating accumulated costs that have an indirect relationship to the cost object. For
example, a publisher that purchase paper rolls for printing magazines collect the cost of paper
bought and used in any one month to obtain the total monthly cost of paper used. Beyond
accumulating costs, the cost accountant assign cost to the different magazines the publisher
publish to help decision making.. (Horngren etal, 2005)

2.15.Joint Cost and By-Product Cost

Joint cost and by-product costs create especially different cost allocations problem.. By
definition, such costs relate to more than one product and cannot separately identify them with
an individual product.

A. Joint Cost

The cost of materials, labor, and overhead incurred during the joint process are called joint
costs. The separate products become identifiable at the split off point. The manufacturing costs
incurred up to this point usually cannot be specifically identified with any one of the individual
products. (Nagy and Vander back, 1996)

A joint production process results in two or more products, which are termed joint products.
The cost of the input and the joint production process is called a joint product cost. The point in
the production process where the individual products become separately identifiable is called
the split off point. For product-costing purposes, a joint product cost usually is allocated to the
joint products that result from the joint production process. Such allocation is necessary for
inventory valuation and income determination, among other reasons. (Horngren and etal,2005)

B. By-Product Cost
24
In accounting for by-product, the common practice is to make no allocation of the processing
costs up to the split off point. Costs incurred up to that point are chargeable to the main
products. (Nagy and Vander back, 1996) By-product costs are similar to joint cost. A by-product
is a product that, like a joint product, is not individually identifiable until manufacturing reaches
a spilt of point. By-product differs from joint products because they have relatively insignificant
total sales value in comparison with the other product emerging at split off.

In contrast, joint products have relatively significant total sales values at split off in comparison
with the other jointly produced items. Manufacturing operations usually produce some
imperfect unit that cannot sell as regular items. The controls over imperfect unit item and
operation that waste materials are important elements of inventory control. Scrap or waste
materials may result naturally from the production process or unavoidable mistakes during
production.

2.16.Empirical Review
What kinds of cost accounting practices are used in manufacturing? Briefly etal (2001) provide
an excellent overview of descriptive research based on excellent surveys of cost accounting
practices in the manufacturing sector in Europe. The result of prior research are examined in
seven areas :how many accounting systems firms use ,product cost structures ,the application
of blanket overhead rates, the bases used to calculate overhead rates, the use of product cost
in decision making, the use of product cost in product pricing ,and the application of activity
based costing (ABC).Examples of studies about cost accounting practices in other parts of the
world include Boer and Jeter (1993),Guilding et al (1998) comparing New Zealand and
uk ;Wijewardena and De Zoysa(1999) comparing Australia and Japan; and Al chen et al (1997)
comparing Us and Japen .chenhall and Lang -field-smith(1998a) also review the empirical
literature on management accounting practices when presenting their findings of a survey of
manufacturing firms in Australia .Fry and Steele (1995) and Fry et al (1998) investigated
differences between users and non-users of standard costing using survey data they found no
statistically significant differences between these two groups in terms of production
environment .However they did find that manufacturing companies that did not use standard
cost systems had a better performance on non-financial criteria for inventory turns,scrap
reduction, quality complaints reduction, and delivery complaints reduction ,and fewer
situations of dramatically increased shipments near the end of the financial reporting period.
What kind of "technical " changes do firms make to adjust cost accounting to modern
manufacturing operations? patell (1987) studied the impact of the manufacturing changes on
cost system design. In a case study of implementation of JIT ,he found that more effort was
25
directed to understanding the casual structure of indirect manufacturing costs ,moving away
from using direct labor as the only basis for allocating these costs. Also the accounting system
was simpler as it evolved from product batches to process costing. The study highlighted the
interplay of cost accounting and quality control and suggested that the design and role of the
cost accounting system should be interpreted in the context of the information gathered from
other sources, such as quality control system. For instance, higher level of cost aggregation may
come with increasing financial information from such system. Also using a case study detail of
non Ahlstrom and karlsson (1996) found that the modernization of manufacturing led to
simpler and less detailed formal reporting, and easier cost tracing.

Other studies looked at multiple companies (either on the basis of a limited number of site
visits or on the basis of a survey) and generally found little support for a systematic relationship
between manufacturing changes and accounting change. Gosse(1993) investigated how the
integration of manufacturing process and the application of computer-aided technology
affected the design of cost accounting systems(cost identification ,cost entry ,cost assignment,
and cost reporting) contrasting four computer-integrated manufacturing plants and four
traditional plants, he found some support for the hypotheses that firms adjusted their cost
center structure, cost allocation basis ,and reports (financial and non financial) to computer-
integrated manufacturing systems. Using survey data ,Karmarkar et al (1990)investigated the
relationship between cost accounting design and characteristics of the firms out put market and
production technology. The cost accounting characteristics were number of over head cost
pools, number standard cost variances reported ,frequency and reporting lag of accounting
reports, and degree of reporting performance evaluation data .The independent variables were
type of production performance influenced the diffusion process ,but in an inconsistent
manner. Two companies in the automotive component- manufacturing sector cited that much
documentation and performance measures were required to satisfy the requirements of
customers, In both companies, power full customers had a strong influence on the rate of
adoption of performance measures. Daniel and Reitsperger( 1992) studied wether a focus
reduced the need for short-term cost information for managers, because targets and feedback
could be based on quality performance in non-financial term (such as reject ,re-work, scrap)
that directly reduced costs, Using survey data from the US and Japan, they found that goal
setting and feedback focused primarily on non-cost measures .However, a relatively large
proportion of mangers also received such feedback in cost terms. While cost feed back was
seldom supplied on daily or weekly basis,it was often provided to managers monthly. Does
"better " costing information contribute to better performance ?Based on a a positive of
manufacturing companies ,Foster and Swenson (1997)reported survey association between
ABC adoption and performance In another study, Swenson (1995) investigated the benefits of
ABC in 25 manufacturing firms. Respondents reported significant improvement in use of and
26
satisfaction with cost management information was most frequently used for product pricing
and product mix decisions as well as for process improvement decisions. Using survey data
about reported financial and non- financial performance, Ittner et al (2002) investigated the
association between ABC and manufacturing performance. Extensive use of ABC was associated
with higher quality levels and greater improvements in quality and cycle time. Also ,ABC use
was significantly associated with modern manufacturing practices. They found weak support for
the association between plant's ABC and profitability being a function of the "match" between
a operating environment and ABC use. (hand out of management accounting research)

CHAPTER 3

METHODOLOGY
This chapter presents that method that used to address the research problem that include,
research design, target population, sampling technical and sample size, source of data, method
of data collection and data analysis and presentation.

3.1 Research design

A research design is the set of method and procedure used in collecting and analyzing measure
of the variables specified in the problem research.

27
in order to answer the basic research question raised above the researchers select descriptive
forms of research design. Because, the aim of this study to describe the present cost practice
problem and to give the possible solution and recommendation to Adama steel factory also
descriptive method helps the researchers to achieve the desired objectives in clear, simple and
precisely.

3.2 Target population

The study would be assess on cost accounting practice due to this the researchers focuses on
department, management office and financial department and some other area in relation to
cost.

3.3 sampling technical and sample size

The researches were used non probability sampling technique, specifically judgmental sampling
method. The reason to select these sampling method is because to selected respondents that
have the expected good knowledge, awareness about the cost system in the industry as well as
the researcher permit to have complete freedom of selecting individual who can provide
relevant date and to choose sample element according to the researcher desire. A sampling of
7 employees will be taken from the costing department based on their position for questioners.

3.4 source of data

The study was used both primary and secondary sources of data. The primary data would
obtain from primary sources using, structured personal interview questions and would
distributed questionnaires. The secondary data would obtain from various reading document
reference in related to the topic

3.5 method of data collection

The primary data would be collected from customers, employees of the institution and
management on the current situation of the intstitutions and performance of employee and
secondary data would be collected from books, manuals and reports. In the questioners, the
researcher use both close-end and open-end questions in such away that they should generate
important information on cost accounting practice on Adama steel factory.

3.6 data analysis and presentation

After the necessary data was collected, the researchers analyzed and presented in logical ways
to reflected the set of objectives and it could presents through tabulation and percentage that

28
employ to present the result depends up on objectives, to show the impact of quantitative
factors on cost accounting practice in order to make profitable decision.

29
 Reference

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Banerjee,Bhabatosh.Cost accounting. USA:New Brunswick, 1997. Cherrington, 0. Cost
Accounting. 18th ed. San Francisco: West, 1998. .Coulthrst, N. Cost Accounting: Principles and
applications. 4th ed. Singapore: B and Jo, 1999 Davidson, Sidney, Michael W.Maher, Clyde
P.stickneyand Roman L.weil. Managerial Accounting an introduction to concepts, method and
uses. 3rd, USA: Dryden press, 1988. Hilton, Ronald W. Managerial Accounting. 3rd ed. USA:
McGraw-Hill, 1997 Horngren, Charles.T, Walter T. Harrison, JR., Lind Smith Bamber. Accounting.
4th ed, New Jersey: Prentice-Hall upper saddle river, 1999 Horngren, Charles.T, George Foster
and Sirkant M. Datar.Cost Accounting at managerialemphasis. 8th ed. Horngren, Charles.T. Gray
L.Sundem and William O.Stratton. Introduction to Management Accounting. 13th ed., New
Delhi: Prentice-Hall, 2005 Jain, S.P and K.L, Narang. Cost and Management. 2nd ed. Kalyani,
1996 Jain, S.P and K.L, Narang. Elements of Cost Accounting and Store Management. 5th ed.
New Delhi: Kalyani, 1996. Nagy, Charles. F and Edward F. Vanderback.Principle of Cost
Accounting. 10th ed. USA: Southwestern college, 1996

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