a study on the cost accounting systems followed by fred hallows iol laboratory

7/30/2019 A Study on the Cost Accounting Systems Followed by Fred Hallows Iol Laboratory

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Research Proposal

A STUDY ON THE

COST ACCOUNTING SYSTEM

FOLLOWED BY FREDHOLLOWS IOL LABORATORY

ASMARA, ERITREA

PREPARED BY

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


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CONTENTS

S.No. Title Pg. No.

1.1 INTRODUCTION - 3

1.2 SIGNIFICANCE OF THE STUDY -

1.3 NEED AND IMPORTANCE OF THE STUDY -

1.4 STATEMENT OF THE PROBLEM -

1.5 OBJECTIVES OF THE STUDY -

1.6 OVERVIEW OF REASERCH METHODOLOGY -

1.7 LIMITATION OF THE STUDY -

1.8 CHAPTERZIATION -

1.9 SUMMARY -

1.10 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, assigningcosts 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 T. Horngren, G. Foster, M. Datar, 19972 Garrison, Noreen, Chesley and Carroll, Managerial accounting, 2004, 6th edition Page 82-83

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UNIT COST = Total manufacturing cost

(Per liter, kilogram, bottle) 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 thenumber units in the job to arrive at an average cost per unit.

Differences between Job & Process Costing

3Garrison, Noreen, Chesley and Carroll, Managerial Accounting, 2004, 6th edition, Page 83

4

Process CostingProcess Costing

SystemSystem

Masses of identical orsimilar units of aproduct or service

Job CostingJob Costing

SystemSystem

Distinct units of aproduct or service


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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.

4Garrison, Noreen, Chesley and Carroll, Managerial Accounting, 2004, 6th edition, Page 84

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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

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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.

1.3NEED 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.

1.4STATEMENT 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

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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. To study the process costing system followed in Fred Hollows IOL

Laboratory.

2. To study the flow of cost in process costing system in Fred Hollows IOL

Laboratory.

3. To study the problems faced while implementing the process costing

system in Fred Hollows IOL Laboratory.

4. To study the impacts of putting into practice the process costing system.

5. 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.

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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:

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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-periodcost. 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 ofFinancial 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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a study on the cost accounting systems followed by fred hallows iol laboratory

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