DEBRE MARKOS UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF THE FACTORS THAT AFFECT COST CONTROL

SYSTEM

(CASE STUDY IN SELAM FLOUR FACTORY IN DEBRE MARKOS TOWN)

RESEARCH PAPER FOR PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE DEGREE OF ACCOUNTING AND FINANCE
 PREPARED BY

NAME IDNO

1. YEHUALAW BOGALE……………………………………………………………………………..… BEE/2405/

2.YITAYISH ENAWGAW………………………………………………………………………………….BEE/2446/08

3. YENEWORK ADANE…………………………………………………………………………….........BEE/2409/08

ADVISOR: YICHILAL S. (Msc)

Table Contents pages

CHAPTER ONE

1. Introduction......................................................................................................................1

1.1Background of the study.................................................................................................1

1.2 Background of the organization.....................................................................................3

1.3 Statement of the problem...............................................................................................4

1.4 Objective of the study....................................................................................................5

1.5 Research questions…….………………………………………………………………5

1.6 Significance of the study................................................................................................6

1.7 Scope of the study..........................................................................................................6

CHAPTER TWO

2. Literature review..............................................................................................................7

2.1Meaning of cost...........................................................................................................7

2.2 Classification of cost..................................................................................................7

2.2.1 Direct and Indirect cost ……………………………………………………………………………………………………..7

2.2.2 Fixed and variables cost..........................................................................................8

2.2.3 Controllable and non controllable costs..................................................................8

2.2.4 Relevant cost and irrelevant costs...........................................................................9

2.3 Elements of cost............................................................................................................9

2.3.1 Material cost………………………………………………………………………..9

2.3.2 Labor cost................................................................................................................9

2.3.3 Expense................................................................................................................. 10

2.3.4 Actual and Standard cost………………………..………………………………10

2.4 Cost objectives......................................................................................................... 10

2.5 Meaning of control................................................................................................... 11

2.6 Meaning of system................................................................................................... 11

2.7 Cost control system.................................................................................................. 12

CHAPTER THREE

3. Research Methodology...............................................................................................14

3.1 Research Design.......................................................................................................14

3.2 Research Approach………………........………………………………………..……14

3.3 Method of data collection………………………………………………………...….15

3.4 Sources of data..............................................................................…………........16

3.5 Target population…………………………………………………………………16

3.6 method of data analysis…………………………………………………………...16

Reference.......................................................................................................17

CHAPTER ONE

1. Introduction
1.1Background of the study
Cost control is use by management of cost analysis and interpretation in corrective action or
measures to award increasing efficiency and economy of operation. (ARORA, 2003)

System of standard costing is in operation that cost control measures can give their best. The cost
control aims at reducing in efficiency wastage and setting up predetermined cost and in
achieving them cost control is exercise through setting standards norms or targets and comparing
actual performance. (Brewer, 2006)

Cost accounting is applies primarily to manufacturing organization that combine and process row
material into finishing products. The major factor in business planning is the cost of producing
the companies’ products in order to achieve major goals of the business. Today in the
competitive market customers need to good quality products that are delivered when they need
them and at the exact price. As a result manufacturing companies are under: In practice
supporting the goals of reducing cost and quality product’s is to under stand cost behavior to
closely control cost. Detailed cost accounting system an important requirement for systematic
cost control and decision making to make intelligent decision manager want reliable
measurement. (Horngern, 2003)

Cost control systems that do not provide reliable information do not help managers; make
decision in face without reliable cost information decision can be downright harmful. For this
reason the management must understand the nature and behavior of different elements of costs
known when and where they are incurred and who is responsible for them. Manufacturing
enterprise grows and mature their managerial control system involved with the volume and
complexity of operation. A system of control begins with a set of historical records. Financial
results of the current period compared with the results of period differences are noted and causes
of deferent are investigated. Following such analysis managerial action can be taken to corrective
unfavorable situations or to promote favorable results. (Hilton, 2002)

In manufacturing companies the largest deduction from sales is cost of goods sold to determine
net income. Combined financial accounting is based on accrual where as cost accounting
emphasizes or the further and deals with cost behavior, cost ascertaining and cost control. There
for manufacturing firm should give due attention for cost accounting cost control service as a
tool that improves management decision it’s also major means of helping manager to administer
each of services of an organization.

Manufacturing organization has distinctive nature that is transferring raw materials in to finished
goods. This process results in three different types of cost.

Namely

 Direct material cost: - the cost material purchased includes both raw materials
which are to be assembled into a complete unit that can be directly economics feasible
with final products.

 Direct labor cast:- Incurred for labor hour worked to be include direct labor it should be
possible to be include direct labor its should be possible to physically observe the time it takes to
perform given operation on an individual products unit is the workers time that can be directly
traced to the production.

 Over head cost: - includes manufacturing cost other than the cost which is separately
identified as material and labor. (Noler,2000)

Selam flour factory is one of the manufacturing companies. It is engaged in the production of
finished products form a combination of raw materials.
So it will be great importance for such firms to adopt a well developed cost control system.
Considering the huge amount of in put in raw material and labor, so having a good cost control
system helps manager for decision making that helps towards achieving organization objective.

1.2 Background of the organization

Selam flour factory is one of the flour manufacturing plants, under the supervision of Ethiopian
Food Corporation, It is found in the west of University of Debre Markos.

S.F.F which had formerly used for wheat to produce flour since 2004 E.C. It was established as
manufacturing plant under the supervision of the Ethiopian food corporation, nationalized in
accordance with the proclamation no 89/87.

The factory was established with its a paid up capital of 4 million birr, when the factory started
its operation in 2004 E.C by the private enterprise it had one heat mill machine producing
capacity of this machine at the time was 480 quintal flour in 24 hrs with up to 25 employees .

The factory machine were repaired because of their depreciation, but there is no an over all
change on the machine. As a result of this, now a day the producing capacity of the machine are
declined in to 400 quintal in 24 hrs.

Presently the factory has five departments, these are

 Finance department
 Management department

 Maintainece department

 Labor force

 Administer department
Currently along with these five departments there are 25 employed, from these, 20 employed are
males and the remaining 5 employees are females. Major activities of the factories are:-

 To produce and sell different kinds of flour and related products with there related by
products.
 To develop the existing factory and to build anew factory if necessary to increase the
delivery.

1.3 Statement of the problem

Cost control system in manufacturing companies that transforms raw materials in to work in
process and finished goods. Selam flour factory is one of the manufacturing firms which perform
cost control system to control cost incurred for direct material, labor and over head cost.

Without a good cost control system the company leads to hazardous. The largest deduction from
gross profit is cost of goods sold in calculating net income. A good cost control system has
contribution for the company profitability, management decision and also helps to make
corrective action.

According to Ojugo (2003), cost control means steps taken by management to assure that the
cost objectives set down in the planning stage are attained and to assure that all segments of the
organization function in a manner consistent with its policy. For effective cost control, most
organizations use standard cost system, in which the actual costs are compare against standard
costs for performance evaluation and the deviations are investigate for remedial actions.

According to Ismail (2001), successful cost control strategies require inventory data update.
Author suggest best practice, cost control depends upon frequency and time lines of inventory
which means daily business reports, weekly trading reports and monthly reports.

According to Wood (2008), looks at cost control with a very practical approach .He says that
costing process in its entirely time consuming and therefore costly in terms of management time
and resources. He also argues that the cost and time involved are not justifiable because the result
is based on many unknown factors and the actual performance will almost certainly be different.
As researcher’s mentions above the topic ‘cost control’ is very researchable title but, we
considered that there is the time gap between the previous researches. It is very old research
paper that is not fit with the cost control system of current time. And also, we consider a place
gap that is the research paper about cost control did only in other places not in Debre Markos
town as the result our research will conduct in Debre Markos town to limit the place gap. In
addition in the previous research there is no sufficient document that shows in detail about cost
control. This shows there is literature gap in the previous research. Also, the research didn’t show
how the cost controls system implements in effective and efficient ways due to knowledge gap.

 Research questions

This study would try to answer questions concerning with cost control system of the Selam flour
factory to achieve the stated objective. These are:

 Does the organization have cost control mechanism?

 What type of costing method is used by the firm?

 Does the organization have effective cost control system?

 How are actual and standard cost allocated?

 How management is utilize cost control for decision making?

1.5 Objectives of the study

1.4.1 General objective
The general objective of the study will be to assess the factors that affect cost control system of
Selam flour factory.

1.4.2 Specific objectives

 To investigate the system of cost control for direct material labor and factory over head costs.
 To examine cost control mechanism of the organization.

 To identify what types of costing method will be used.

 To assess the actual and standard cost of the organization.

 To assess how management is utilize cost control for decision making.

1.6 Significance of the study

It is obvious that effective cost control system plays an important role to the success of the
business.

This study will assess the cost control system and identify it there is a propos in controlling cost
and recommend some suggeste solution.

It helps to take the result of this research the concern body in the organization or any interest
individuals can extend the study and identify more special cost control system.

1.7 Scope of the study

The study will assess the cost control system of Selam flour factory. Under this we will try to
present the company’s performance towards cost control system.

The problems which affect the company’s profitability and possible suggestion that will be carry
the problem of the organization.
 CHAPTER TWO
2. Literature review

2.1 Meaning of cost

The term costumer has wide variety of meanings. Generally “cost: means cost of production
which related to the money expenditure of concern on various factors of production.

Cost refers to an out lay or expenditure of money to produce goods and services that assist in
performing business operations.

The National Association of Accountants (NAA) defines cost accounting is as follows.

Cost accounting is the primary concerned with the recording and reporting of the cost of
manufacturing goods and performing goods and performing services

The scope of the term of cost is broad and general, because cost includes not only the actual
expenditure but also the national expenditure which does not involve any cash out lays. (RAO,
2000)

2.2 Classification of cost

 Classification of cost is the process of grouping cost according to their common characteristics.

2.2.1 Direct and indirect cost

Direct cost: these are those cost which are incurred and conveniently identifies which
particular cost unit, process or department. Cost of raw materials used and wages of machine
operators are common examples of direct cost (Hongren, 2005)

Indirect cost: These are general cost and are incurred for the benefit a number of cost units
process or department’s. These costs cannot be conveniently identified with particular cost unit
or cost center. Depriciations of machinery, insurance, lighting, rent, managerial salaries,
materials used are common examples (Horngren, 2005).

2.2.2 Fixed and variables cost

Fixed cost: These costs remain constant in total amount over specific range of activity for
specific period of time i.e. these do not increase or decrease when the volume of production
changes building range and managerial salaries remain constants and do not chance with
change without level and :these are fixed costs. (Horngren, 2005)

Variable cost: Those costs tend to vary indirect preparation to the volume of out put. In other
words, when volume output increase total variable cost also increase and vise versa when
volume of out put decrease, total variable cost as so decrease, but the variable cost per unit
remain constant. (Horngren, 2005)

Semi- variable or semi fixed costs

These costs include both fixed and variables component i.e. these are partially fixed and partly
variable for example introduction of an additional shift in the factory will require additional
supervisors and a certain cost will increase by steps. (RAO, 2000)

2.2.3 Controllable and non controllable costs.

Controllable cost: These are the costs which may be directly at a given level of management
authority. Example cost of raw materials may be controllable by purchasing in large quantities.
Non controllable cost: These are these costs which cannot be influenced by the action of
specified member of an enterprise (ARORA, 2006).

2.2.4 Relevant cost and irrelevant costs

Relevant cost: are relevant cost is a cost whose magnitude will be affected by decision being
made. Hence relevant costs are future costs that will differ depending on the action of the
management for each decision; the management must decide which costs are relevant.

Irrelevant costs: These are those costs that will not be affected by decision. To take an example
from day to day life one may have to decide about making journeys by own car or by public
transport bus. In these decisions insurance cost of car is relevant because it will not change
whatever alternative is chosen.

2.3 Elements of cost

2.3.1 Material cost: According to C.I.M.A London, materials cost is the cost of commodities
supplied to an under taking. Materials costs include cost of procurement, freight in words, taxes,
insurance etc.

Direct materials: Direct materials cost is that which can be conveniently identified with and
allocated to cost unit

Direct materials generally become a part of the finished product.

In direct materials: These are those materials which cannot be conveniently identified with
individuals costing units.

2.3.2 Labor cost

Labor means human efforts engaged in the process of production, Labor may be direct or
indirect.

This cost of remuneration (Wages, salaries, commission, bonus etc.

Direct labor: Direct labor consists of wages paid to worker directly engaged in converting raw
materials in to finished products.
 These ways can be conveniently identifies with particular products, jobs or process. Wages paid
to machine operator is case of direct wages.

Indirect labor: is a general character and can not be conveniently identified with particular cost
units.

In other words indirect labor is not directly engaged in the production operations but only to
assist or help in production operations.

2.3.3 Expense
All costs are other than materials and labors are termed as expenses. It is defined as the cost of
services provided to under taking and national cost of the use owned asset.

Director expenses: direct expenses as those expense which can be identified with and allocated
to cost center as or units. It is chargeable expense (RAO, 2000)

Indirect expenses: - all direct cost, other then indirect materials and indirect labors costs are
formed as indirect expenses. These cannot be directly identified with particular job process order
and are common to cost units or centers (RAO, 2000)

2.3.4 Actual cost and standard cost

Actual cost: Usually are measured as the past payments for currently owned resources.Standard
cost: are predicted or forecasted payments for future resources. Standard cost is a carefully
determined cost based on efficient operations. Standard cost aims to exclude past in efficiencies
and aim to take in to account changes expected to occur on the budgeted period. It also indicate
the costing system of an organization whose activities consist of a serious of common repetitive
operations. (Maher, 2000)

2.4 Cost objectives

As a manager you will often want to know the cost or work of something to help make decision.

We can this some thing a cost objective or cost object defined as any thing for with decision
make desire separate measurement of costs.
Although you will most often want to know the cost of the product or services there are many
other cost objectives that your might use example of cost objectives includes customers
departments, territories and activities such as processing orders or moving materials for example
one large manufacture of pet foods products recently it charged its cost managements system to
report both the cost of products its makes and the cost to serve the companies major retail
customers. It discovers that all its produced where profitable, but the cost to sell to and service’s
some customers was greater than the profit margin on the products sold to these customers.
(RAO, 2000)

These by using a combination of the cost objectives it learned that some customers were serious
drain on the company’s profit. The company is able to develop strategy to improve the profit
ability of those customers and charge the way it conducted business to reduce its operating costs.
(RAO, 2000)

2.5 Meaning of control

Controls is managements systematic efforts of achieve objectives; Activities are continually
monitored to see that results stay with in desired boundaries. Actual results of each activity are
compared with plans and its significant differences are noted, remedial action may be taken. The
concept of control is business differs form that used in engineering whether controls are designed
work continually to use physically measured as their information imputes, and to work largely
independently of human decision making.

Thermostats and fuse are simple examples of engineering controls. In contrast the control
process in business a ways includes human decision marker. In addition the information on
which control action are based includes financial information and the control activity is periodic
rather than continuous. (Brewer, 2006)

2.6 Meaning of system

System is a set of two or more interrelated component that interact to achieve goal system are
almost always composed of small subsystem, each performing specific function important to and
supporter of the large system of which it is part. (Steinbort, 2000)
2.7 Cost control system

To support managers decision accountant go beyond simply determining the cost of products and
services to developing cost management system. Cost management system collections of tools
and techniques that identify how management decision affects cost. The primary purposes of cost
management system are to provide.

Internal managers need accurate and timely cost information for strategies reasons such as
deciding on the optimal product and customers mix choosing the value chain function to receive
special focus or to out source and making investment decision for these decisions, managers
want to know the cost of individuals production services customers, and process associated with
value, chain functions. (Stratton, 2002)

Cost managements aims of cost control introducing in efficiencies’, wastages and setting up
predetermined cost and in cleaving them cost management and cost control area a excised
through setting standards or forgets and comparing actual performance there with a view to as
sustaining develops form get to forgather standards.

Cost management system takes more compressive role in an organization then traditional costing
accounting system cost management system is manage, planning and controlling with the
following objectives.

 To measures the cost of the resources consumed in performing the organization significant
activates.

 To identify and eliminate non value added costs taste are the cost of activities that can be
eliminate with no deteriorations of products quality performance or perceive value.

 (Dearden,2002)

 Cost control is management and control of activities to determining product costs accurately
to improve business to eliminate wastages to identify cost devices, to plan operations and to
set business strategies. A cost control system is amendment accounting and reporting system.
That identifies monitors and maintains continuous detailed analysis of company’s activity
and provides managers with timely measures of operating results (Maher, 2000)
  Material usage variance calculates for each process spending however usually the
responsibility of the management level higher than the process because material purchased in
common for all process. Direct labor the labor spending variance represent the changes in
cost which results from using a mix of labor classification and pay levels different from these
including in the budget. Control the amount of labor used will usually be the most important
responsibility of process managers. It is there for importance that the actual and the budget
labor usage be compared for each process.

This comparison is the basis of the labor usage variance which is allocated for each process.
Over head in many firms over hand is a central support function provided by service
department and shared by several processes. This allocation should be made only when a
process managers has some degree of control over out put such as scheduling production .
(Frank,2005) A standard costing system is a cost control techniques that identifies the cost
that should be incurred during normal operation of the end of time period. Actual cost are
compared with the standard cost difference are called variance. Variance analysis high right
are of operations in which corrective action needed. Standard cost may be used in both
process and job order costing system. The some attributers that favor the use of standards
routine and standardize operation are also attributing of process system. Process cost system
is typically used by firms the produce a large number of identical units.

The volume and speed of production is such firms usually make if uneconomical and infeasible to
determine the actual cost each unit produced costing to therefore accomplishing by using
predetermined standards cost or by competing on average cost for all units produced during time
period.
(Noler, 1997)
The responsibilities for cost control should be assigned to specified individuals who are also
accountable for budgeting the cost under their control each managers responsibilities should be
limited to the cost and revenues that are controllable by the managers, and performance is
generally measured by comparing actual costs and revenues with the budget.
To achieve these goals are called responsibility accounting systems. (Nedles, 1991)
To aid in controlling cost, the cost accounting may use predetermined cost amounts called
standard cost.
 Standard costs also can be the foundation for budgets and cost reporting. Standard cost are
examined on other important aspects of cost control is the identification of the cost of the different
activities rather than the cost of different department and products. In complex production setting
often only small fraction of activity actually adds value to the final output; other activities called are
non value added activities, generally are a result of complexity of production setting and are not
specific to the production of any particular good or service. Reporting the cost of non- value- added
activates is first step toward their production or elimination (John, 1998)
A management control system is means of gathering and using information to aid and coordinate the
planning and control decision through an organization and to guide the behavior of its management
and employee management control system refers to formal and informal control system. The formal
control management system of the company includes these explicit rules, procedures, performance
measures and incentives plans that guide the behavior of its manager and employee. The formal
control system insert consist of select system.
The management accounting system is formal accounting system that provides information
regarding costs.
Accounting system is formal accounting system that provides information regarding to costs,
revenues and income. To be effective management control system should be closely deigned to the
company strategies and goods. (Geagrefaster, 2003)

CHAPTER THREE

3. Research Methodology
3.1 Research Design
the research is more of descriptive in nature. The researcher will be used qualitative methods of
approach in which the researcher collects analyses and interprets by using qualitative data.
Qualitative approach will be used to get generalization about the study.

3.2 Research Approach

There are three research approaches use researchers in their study examining the applicability of
each.

3.3 Method of data collection

In order to collect the primary data structure personal interview will be selected. Structure
personal interview help for explain the answer given by the respondents. The secondary data
collections are less expensive than primary data collectio.

3.4 Sources of data

As far as the information will concern with primary source of data will be used. The primary data
will be allocated from primary source using, structure personal interview question s. This type of
questions the researcher design by using equal proportion to close end questions. Generally the
primary data can be obtain from those bodies that are responsible for cost control system (i.e. the
cost accounting department, human resource department),

3.5 Target population

The target population of this study is 25 employees currently work in the factory. The researcher
will be conducted this study by census investigation. Currently there are 25 employee, from these
20 employees are males and the remaining 5 employees are females.

3.6 Method of data analysis

 The data will be analyzed through different tools. The main tools will use in this study is for comparing
descriptive analysis which will be better and it will be simple and verify drawing inferences will be
used. This research paper will also analyze data by using tabulation metho d .

Table 1: Financial breakdown for all personnel, material and other logistics costs, 2019.

Item Quantity Unit cost(Birr) Total cost(Birr)

Paper 60 0.50 30.00
Personal cost Equipment and stationary

Pen 3 6 18.00
Ruler 1 5 5.00
Binder 1 80 80.00
Flash 1 150 150.00

Transportation 100.00
Internet 30hrs 0.35 cent 10.5
Typist 60 pages 5 300.00
Printing 60 pages 1 60.00
Copy 60 pages 0.75 45
Total cost 768.50
 Time budget

Responsib Months
S/no
ility

Lists of Activities Feb Ma Apr June

May
r . .
Researcher
1. Proposal development
s
Getting ethical clearance from the Researcher
2. s
university
Data collection, Researcher
3. s
Analysis and report writing Researcher
4. s
Submitting final report to the Researcher
5. s
department
Final defense Researcher
6. s
 References
Charles T.Horgangren George faster (2003) introduction to Management accounting, 12th edition

Charrigton John (1998), Managerial Accounting, 6th edition

Hilton Maher selto (2000), Cost management, 1st edition

Hilton, Maher selto (2002), Cost management, 2sd edition

Horngren sude Stratton (2002), cost accounting, 11th edition

Horgren (2005), cost accounting, 12th edition

John Dearden (2002), Cost and management accounting, 5th edition

Marshal .B romey Poul John (2000)

Michael noler, (1997), cost and management accounting, 6th edition

M.N ARORA, (2006), Cost and management accounting, 9th edition.

M.N ARORA, Delhi university and Hans Raj college,(2003), Cost and management accounting,
7th edition.

Noreen Brewer, (2006), Management accounting, 2nd edition

Roger storel, New York (2013), Cost and management accounting

V.S.P RAP, Venkateswara (2000), managerial accounting, 6th