-857885-799465 FINAL PROJECT Submitted to

Submitted to: Dr. Imran Riaz Malik
Submitted by: Farwa Khan
ID : 22348
Understanding the current practices of cost accounting system in Libyan agriculture firm: Evidence from six Libyan agriculture firms
(By Abobaker M Fatah and Rosliza Mat-Zin)
A qualitative approach is used in this paper to perceive the practices in Libyan agriculture firms. Six interviews were took from the employees of Libyan agriculture firm to understand the practices.The findings indicated that traditional costing is widely used in the Libyan agricultural firms and full absorption costing is used to calculate the product costs. Cost information mainly used for pricing decisions in the Libyan agricultural firms.


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Agriculture in Libya is an important activity.Their economy depends on agricultural activities (Ayoub, 1967). In 1959 oil field was discovered by the Libyan government which has had a very huge impact on the agriculture,this made agricultural sector the second most important sector after oil in Libya (Alsabbag & Alseheri, 1992). In 1954 its agriculture contribution was 26% (Gandeel, 1978; Helen, 1987).This percentage influenced by discovering oil, the percentage became 5.6% in 1997, and 2.1% in 2007.To support the agricultural sector (General People’s Committee for Agriculture, Livestock and Marine, 2009) 5.5 billion dinars are spent and Libyan government has made a five-years plan from 2006 to 2010 which allocated 3.3 billion dinars.

Libyan government announced law number 5 named “encouragement of investment decision” (Bureau of economic, energy and business affairs, in the year 2009) to reduce the import of agriculture products. To prosper the agricultural firms in North of Libya thegovernment engineered a colossal project referred to as nice Manmade stream(GMR) to irrigate several agricultural companies within the North of African country. 33.69 billion dollar was spent on this project to transfer water from the south to the north of Libya. agricultural firms in Libya are covering an area of 3,600,000 acres of arable land (Gandeel, 1978). The agricultural firms do not pay attention to the cost accounting system in decision making processes, cost reduction, and cost control as in other sectors.

In this research the researcher aims to answer four questions including: do Libyan agricultural firms practice cost accounting systems? To what extent Libyan agricultural firms use cost accounting system information?, How Libyan agricultural firms allocate indirect cost to their products?, and how Libyan agricultural firms determine their product cost?
The development of cost accounting systems in the agricultural activities.

Cost accounting systems in the agricultural sector was evolved in 18 century,and it brings a change in technological development in agriculture, such as cultivation techniques, which noticed multiplied agricultural production and use of capital additionally improved crop rotation systems.In 18th century, the practice of farm book-keeping was at an infancy stage (Juchau,2002). Arthur Young grabbed the opportunity of absence of cost accounting practices in the agricultural sector. Young endorsed improved practices in cost management including cost comparisons, cost allocations and product costs which reflected the realities of operating a mixed farm in the 18th century Britain (Juchau, 2002). Furthermore, practicing cost accounting systems in mixed farms can assist farmers to allocate overhead costs.

Significance of cost accounting systems in the agricultural sector
Multi-product farms and other business companies need cost information. Cost accounting systems achieve three goals including, the measurement of the cost of goods sold, and valuation of inventory for financial reporting. In brief, the agricultural firms can gain many advantages from the use of costing systems. It helps in making better administrative decisions in several ways, such as allocating overhead costs on cost centers in the fields, especially if a farm plants different types of crops and uses many kinds of machines.According to Jack and Jones (2007), farmers who practice costing systems will perform better than farmers who do not apply costing systems.

Studies related to practice of cost accounting in the agricultural sector
Athanasios et al., (2010) stated that the agricultural sector almost neglected from accounting researchers and practitioners, because of the low level of managerial sophistication and lack of economic means in agriculture firms. Implementation of cost accounting systems in agricultural firms can improve farm management and lead to better farm performance. According to (Lee ; Kao, 2000) farm costing is useful to monitor plantation expenditures that are increasing as farming becomes modernized. To achieve this, cost information ought to be supplied adequately and in a timely manner. They applied both the activity based costing (ABC) model and the simulation technique to analyze the operational costs in the Pu Shin wholesale fish market in Taiwan. The ABC system to improve operational performance and cost management. Lee and Kao (2000) hoped to use this system in the agricultural firms. In Libya, the government spends billions of Diners on the agricultural firms which belong to the public sector. These firms produce massive products, including plantation and livestock.

unstructured interview are used to identify how Libyan agricultural firms practice cost accounting systems, an unstructured interview consisted from four sections including information about the interviewees, information about the firm, information about cost accounting systems, and the perspectives of the interviewees. Six interviews conducted with management accountants, financial accountants, and production manager.

Interviewees’ information
Respondent ID Current Position An Interview Date Duration of an Interview
1 Management accountant 9-2-2012 1 Hour
2 Management accountant 7-3-2012 2.5 Hours
3 Production manager 1-2-2012 1.5 Hour
4 Financial manager 5-2-2012 1.5 Hour
5 Financial accountant 26 & 27-2-2012 2 Hours
6 Financial manager 3-2-2012 1 Hour
Organizing the Data
ID Q Response Code
1 1 Manager Position
2 1 Management Accountant Position
3 1 Production Manager Position
4 1 Financial Accountant Position
Organizing the Data for every respondent
ID Q Response code
1 1 Manager Position
2 1 The firm use Activity-based costing Position
3 1 50% direct cost and 50% direct Position
4 1 We use straight-line mehod Position
Sorting the Responses
ID Q Respnse Code
1 5 60% direct cost and 40% direct Cost Structure
2 5 30% direct cost and 700% direct Cost Structure
3 5 50% direct cost and 50% direct Cost Structure
4 5 50% direct cost and 55% direct Cost Structure
1 6 The firm is using Full costing Costing Method
2 6 The firm use full costing method Costing Method
3 6 Full Costing Costing Method
4 6 Full Costing Costing Method
Code development.

Code Code Description
TP Type of Prduction
FS Firm Strategy
CASD Cost accounting system department
DPC Determining Product Cost
The six interviewees stated that they implement cost accounting systems in the Libyan agricultural firms; specifically they use full absorption costing to determine the product cost. In addition, one of the interviewees argue that there are four cost elements in their firms that include labor cost, production requirements, operation and maintenance, and managerial expenses. Most of the interviewees argue that cost information mainly use for setting product prices. While three of the respondents stated that they use cost information in cost control and determine product cost. However, some of them argue that they use cost information in determining the minimum price, make comparison between the year’s expenses, and determine the extra activities. If the actual cost less than the prices set by the agricultural ministry, Libyan government will compensate the agricultural firms by the difference between the cost and selling prices. In one of the agricultural firm’s expenditure statement in 2011, 88% from the expenditure spent on plantation department and 12% spent on livestock department. Therefore, they use cultivated area to allocate overhead costs to plantation products while livestock products loaded only by direct costs. The literature explained that activity based costing is suitable for farming activities all of the respondents stated that they use traditional costing. From the interviewees the Libyan agricultural firms rely on full costing to determine the product cost, they mentioned that there are four cost elements in their firms that include labor cost, production requirements, operation and maintenance, and managerial expenses, this findings supported by the agricultural firms documents.

International Journal of Scientific and Research Publications, Volume 3, Issue 8, August 2013 1
AUTHORS First Author – Abobaker M Abdurahman, PhD (Accounting) candidate, Universiti Utara Malaysia, Othman Yeop Abdullah Graduate School of Business, HYPERLINK "mailto:[email protected]" [email protected] Second Author – Rosliza Mat-Zin, Senior Lecturer, College of Business, Universiti Utara Malaysia, [email protected]