Research Proposal

A STUDY ON THE COST ACCOUNTING SYSTEM FOLLOWED BY FRED HOLLOWS IOL LABORATORY ASMARA, ERITREA

PREPARED BY
Jemal Negash Rizgey Abduruhman Suleiman Mohammed Yosief Sium Tekleab Yosief Desale - 7/779 - 07/19 - 04/202 - 06/2113

CONTENTS
S.No.
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10

Title
INTRODUCTION SIGNIFICANCE OF THE STUDY NEED AND IMPORTANCE OF THE STUDY STATEMENT OF THE PROBLEM OBJECTIVES OF THE STUDY OVERVIEW OF REASERCH METHODOLOGY LIMITATION OF THE STUDY CHAPTERZIATION SUMMARY REFERENCES

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1.1 INTRODUCTION Cost accounting measures and reports financial and other information related to the organizations acquisition or consumption of resources. It provides information for both management accounting and financial accounting. 1 In computing the cost of a product or a service, managers are faced with a difficult problem. Many costs (such as rent) do not change much from month to month, where as production may change frequently, with production going up in one month and then down in another. In addition to variations in the level of production, several different products or services may be produced in a given period in the same facility. Under these conditions, how is it possible to accurately determine the cost of the product or service? In practice, assigning costs to products and services involves an averaging of some type across time periods and across products. The way in which this averaging is carried out will depend heavily on the type of production process involved. Two costing systems are commonly used in manufacturing and in many service companies, these two systems are known as process costing and job-order costing. 2 Process Costing A process costing system is used in situations where the company produces many units of a single product (such as frozen orange juice concentrate) for long period of time. Examples include producing paper at Bowater, refining aluminum ingots at Alean, mixing and bottling beverage as coca cola, and making wieners at IM. Schneider Inc. All of these industries are characterized by an essentially homogenous product that flows evenly through the production process on a continuous basis. The basic approach in processing costing is to accumulate costs in a particular production or department for an entire period (month, quarter, and year) and then to divide this total by the number of unit produced during the period. The basic formula for process costing is as follows:
1 2

T. Horngren, G. Foster, M. Datar, 1997 Garrison, Noreen, Chesley and Carroll, Managerial accounting, 2004, 6 th edition Page 82-83

UNIT COST (Per liter, kilogram, bottle)

Total manufacturing cost Total units produced (liters, kg, bottle)

Since one unit of product (liter, kilogram, bottle) is indistinguishable from any other unit of product, each unit is assigned the same average cost as any other unit produced during the period. This costing technique results in a broad, average unit cost figure that applies to homogenous units flowing is a continuous stream out of the production process.3 Job-Order Costing A job-order costing system is used in situation where many different products are produced each period. For example, a Lvi-Strauss closing factory would typically make many different types of jeans for both men and women during a month. A particular order might consist of 1000 stonewashed mens blue denim jeans, style number A312, with a 32-inch waist and a 30-inch inseam. This order of 1000 jeans is called a batch or a job. In a job-order costing system, costs are traced and allocated to jobs and then the costs of the jobs are divided by the number units in the job to arrive at an average cost per unit.

Differences between Job & Process Costing

Job Costing System

Process Costing System

Distinct units of product or service

3

Masses of identical or similar units of a product or service

4

Garrison, Noreen, Chesley and Carroll, Managerial Accounting, 2004, 6 th edition, Page 83

Job-order costing is also used extensively in service industries. Hospital, Law firms, movie studios, accounting firms, advertising agencies and repair shops all use a variation a job-order costing to accumulate costs for accounting and billing purpose. For example, the production of the British open golf broadcast by TSN would be suitable as a job costing project. 4 Fred Hollows IOL Laboratory The Fred Hollows IOL Laboratory Asmara, Eritrea was established in 1994 with the financial and technical support provided by the Fred Hollows Foundation in Australia with the express intention of providing high quality affordable IOLs for use in extra-capsular cataract extraction and lens replacement surgery. The laboratory was deliberately and purposefully over-engineered in order to guarantee the highest quality manufacturing facility and a finished product that would equal to or better than world class standard. It was designed specifically for the production of single piece intra-ocular lenses and other sterile medical devices. The laboratory was constructed by the people of Eritrea under the direction of engineers and technicians from New Zealand and Australia. It was designed specifically for the production of single-piece intraocular lenses. The plant floor plan, structured design, materials of construction, environment controls are specifically designed to minimize biological and particulate contamination during the manufacture of IOLs and to facilitate cost effective, continuous batch processing of high quality single piece intra-ocular lenses. All manufacturing operations are conducted in Class 10000 clean rooms while finished product packaging is conducted in Class 100 laminar flow workstations.

Garrison, Noreen, Chesley and Carroll, Managerial Accounting, 2004, 6 th edition, Page 84

Objectives The FH IOL Laboratory, Asmara strives to continuously improve Production and Quality Assurance Processes of Intraocular Lens in an effort to better satisfy our customers needs. Our goal is to deliver defect free products to our customers on time, each and every time. In order to maintain the Quality Policy the Laboratory has the following objectives: Maintain compliance to ISO 9000: 2000, ISO 13485: 2003(E) and Medical Device Directives 93/42/EEC for the relevant Product(s) and services. Expansion of market base. Resources optimization. Acknowledge the importance of staff and provide adequate training and employment conditions and encourage staff loyalty, high productivity and the maintenance of the OMS and product quality. Products The Fred Hollows IOL Laboratory produces different types Intraocular Lenses (IOL). IOLs are artificial lenses for replacement of natural lens which has developed cataract. The IOLs are categorized parameters into two, i.e. Rigid and Foldable lenses. All the lenses are lathe cut (machined) to computer controlled parameter then polished using revolutionary polishing system that guarantees the very nest surface and edge finish available. Lenses are quality control tested during each phase of manufacture and ethylene oxide sterilized to ensure the product is of the highest quality and efficiency. 1.2 SIGNIFICANCE OF THE STUDY

A major goal in using any cost accounting system is to calculate product unit cost. The accounting system adopted at Fred Hollows IOL Laboratory uses several work-in-process inventory accounts-for each department or work centre in the manufacturing process. The researchers have identified to determine the potential that Fred Hollows IOL Laboratory has for its growth and to know about the performance of the Fred Hollows IOL Laboratory in relation to the process costing system followed by them. The research will aid to lay a foundation on which further research could be conducted. 1.3 NEED AND IMPORTANCE OF THE STUDY The research paper will aid the researchers to match their academic knowledge acquired with real application in an organization. In doing so, the researchers will gain experience in the field of cost accounting system. The examination, analysis and findings of the research on the costing system followed at Fred Hollows IOL Laboratory may help the organization to improve some of its limitations in the costing system adopted by the company. The findings of the research study could be used as a reference for students and other academicians for further research. 1.4 STATEMENT OF THE PROBLEM The researcher has identified to assess the Process Costing System in Fred Hollows. An in depth study will be carried out to verify the practical implementation of Process Costing System in Fred Hollows. The Fred Hollows IOL Laboratory produces different types Intraocular Lenses (IOL) which are artificial lenses used for the replacement of natural lens for those with cataract. Though the companys lenses are quality control tested during each phase of manufacture and ethylene oxide sterilized to ensure the product is of the highest quality and efficiency, the researcher felt there could be problems like Lack of demand for Lenses, Lack of Raw materials available or insufficient working

capital and above all could be incompetent work force. Thus the researcher found it practical to find out means to solve such problems.

1.5 OBJECTIVES OF THE STUDY The objectives of the research study are as follows: 1. 2. 3. 4. 5. To study the process costing system followed in Fred Hollows IOL Laboratory. To study the flow of cost in process costing system in Fred Hollows IOL Laboratory. To study the problems faced while implementing the process costing system in Fred Hollows IOL Laboratory. To study the impacts of putting into practice the process costing system. To provide suggestions to Fred Hollows IOL Laboratory based on the research findings. 1.6 AN OVERVIEW OF REASERCH METHODOLOGY Research design: Decisions regarding what, where, when, how on the research study is to be completed and is referred to as a research design. This enables the researcher to organize his ideas and look for flaws and inadequacies. In this research the researcher will use an Explorative research design, describing the process costing system followed at Fred Hollows IOL Laboratory. Sampling technique: In sampling technique, simple random sample will be considered. The sample will be collected among the employees.

Data collection: Collection of data will be carried out by the researchers using interview schedules for primary data. Secondary data will be collected from documents of Fred Hollows IOL Laboratory, internet and news papers. Review of Literature: Sabir A. Jaffery (2002), in his article on Role of auditors in managing good corporate governance, stated that an auditors mandate may require him to take cognizance and report matters that come to their knowledge in performing their audit duties being a good governance requirement. 1.7 LIMITATION OF THE STUDY There was lack of convenient time for both the researcher and the officers of the company to bring together the relevant information needed for the study. This was one of the limitations observed by the researchers during this proposal submission phase. 1.8 CHAPTERZIATION The research will compromise of five chapters with the following scheme. CHAPTER ONE: This chapter will comprise about the introduction to costing systems and in particular of Fred Hollows IOL Laboratory of Eritrea. CHAPTER TWO: In this chapter the researchers will collect the various reviews of literature on process costing systems followed in eye glass companies in particular with Fred Hollows IOL Laboratory. CHAPTER THREE:

It is in this chapter that the research methodology adapted for the research will be discussed. CHAPTER FOUR: Chapter Four will bring out the analysis carried out by the researcher based on the data collected from various sources. CHAPTER FIVE: The final chapter in this research work will be about the findings, suggestions and conclusion of the study along with recommendations necessary for policy making. 1.9 SUMMARY The Fred Hollows IOL Laboratory was deliberately and purposefully engineered in order to guarantee the highest quality manufacturing facility and a finished product that would equal to or better world class standard. Methods of production affect the design of product costing system. Mass production of homogenous products is generally characterized by the process industries. The use of process costing in a company is complicated because of the presence of work-in-process inventories. It helps to assess and determine prior- period work and prior-period cost. However, mainly the FIFO method and Weighted average method are used in major inventory valuations.

1.10 REFERENCES P 56 Agrawal, Anup and Knoeber, Charles R., Firm performance and mechanisms to control agency problems between managers and shareholders, Journal of Financial and Quantitative Analysis, September 1996, 31(3), pp. 377 397.
Horngren T., Foster G., Datar M., ( NY: pjh ) Cost Accounting, 1997, p.2

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