Background: According to World Health Organization (WHO) drug use indicators manual, the patients' knowledge on dispensed medication is a crucial patient care indicator. There is a dearth of studies about patients' knowledge of dispensed medication at the primary health care facility. The objective of this study was to assess the knowledge of dispensed medication and associated factors among patients attending in the outpatient pharmacy of Chencha primary level hospital, Southwest Ethiopia. Methods: A facility-based cross-sectional study was employed among 403 patients attending in the outpatient pharmacy of Chencha primary level hospital. The data collection techniques were observation of dispensing process and face-to-face interview by using WHO patient care indicators and a structured questionnaire, respectively. Descriptive statistics, univariable and multivariable logistic regression were determined using the SPSS version 20. Results: A total of 403 patients participated which make the response rate 100%. Fifty-three (13.2%) patients had adequate knowledge on dispensed medication. The findings of multivariable logistic regression indicated that tertiary levels of education (AOR = 3.87; 95% CI [1.25, 11.96]), being private employee (AOR = 10.98; 95% CI [3.25, 37.04]), having severe perception of illness (AOR =3.77; 95% CI [1.43, 9.94]), having three or more visits (AOR =3.20; 95% CI [1.21, 8.44]) and being counseled by pharmacist (AOR = 10.02; 95% CI [4.45, 22.56]) significantly increased the odds of having a "adequate knowledge of medicines." Conclusion: This study showed inadequate level of knowledge of dispensed medicine among patients attending in outpatient pharmacy of Chencha primary level hospital. Patient education, employment status, number of visits, perception of illness, dispenser qualification and experience were the factors for knowledge of dispensed medicine. Dispensers need into account patients' perception of their illness of illness and frequency of visits during counseling.