Steps for Installation of Costing System | Characteristics

CHARACTERISTICS & INSTALLATION OF COSTING SYSTEM

The main objective of introduction of a Cost Accounting System in a manufacturing organisation are ascertainment of cost, determination of selling price, cost control and cost reduction, ascertainment of profit of each activity and assisting in managerial decision making.

Installation of a Costing System

 

The fundamental factors that a Cost Accountant should consider while introducing a system of costing are:

i)                    The existing organisation should be disturbed as little as possible.

ii)                   There should be a gradual and smooth introduction of the system.

iii)                 While over elaboration of records should be avoided, it would be false economy to prune out essentials and impair efficiency.

 

8 Steps for Installation of Cost accounting System-

The steps to be taken in installing a costing system are given below:

1)      1. Objective to be achieved through the costing system. The costing system will be simple if the objective is only to determine cost but it will have to be elaborate if the objective is to have information which will help management in exercising control and taking decision.

2)      2. Studying the existing organization and routine. In this connection the points to be noted are the nature of the business and of the operations or process carried on, extent of responsibility and authority attached to the various functionaries, the lay out of the factory with particular reference to the manufacturing departments, the methods of dealing with wastage of materials, the system of time recording and the methods of computing and paying wages, the system of insuring orders for production to the factory and the amount of fixed, semi-variable and variable overheads.

3)      3. Deciding the structure of cost accounts. What system of cost accounting is suitable and the extent of details required can be decided after a thorough study of the manufacturing process and their ancillary services. The structure of cost account should follow the natural production line, the sequence can be nimble, analytical or synthetic. The designing of the system should be such that there is a gradual buildup of the cost at cach significant stage of production as the product proceed to completion.

4)      4. Determining the cost rates. This entails a thorough study of factory conditions and decisions are to be made about classification of cost into direct and indirect, grouping of indirect costs into production, selling, administration etc., treatment of winter of all kinds, methods of prieing issues, methods of recovering overheads and calculation of overhead rates. A complete cost accounting code should be drawn up so that expenditure may be quickly classified in the office as to both source and cause.

5)       5. Introducing the system. No costing system can be expected to function effectively unless co-operation of all the officials could be obtained. Before the system is put into effect, the implications of the system should be explained to all indicating to them the benefits that will accrue to each and to the business as a whole. However, complete the system is, it should be introduced only by stages and the existing routines and practices should be utilized unless there are good grounds to supersede them. For example, a start could be made with the stores by introducing proper accounts of receipts and issues, opening of bin cards, stores ledgers etc.

6)      6. Organizing the cost office. It is always better that the cost office is situated adjacent to the factory so that delay in routing out documents or in clearing up discrepancies and doubts, is avoided. The costing staff must be allowed to have access to the works if they are to perform their duties properly. The size of staff would depend on the volume of work involved. A costing organization is not worth its existence if it cannot present figures with speed and accuracy and observe simplicity in the presentation of results. The duties of cost office fall into the following spheres:

a. Stores Accounts. Posting of materials receipts and stores issues in stores ledgers, preparing material abstracts

b.  Labour Accounting. Evaluation of time sheets, job cards etc., preparing labour abstracts. In some cases preparation of actual pay rolls.

c.  Cost Accounts. Posting of all cost accounts whether job or process or service accounts

d. Cost Control. Posting cost control accounts from data supplied from sections (i) to (ii) above. Preparation of special statistical and other information for management for carrying out special investigation and preparation of periodical trading statements.

7)      7. Relationship of cost office to other departments. The cost department should function independently, the cost accountant being made directly responsible to the General Manager or Managing Director. The costing system should be designed to serve management at all levels, The cost accountant, therefore, should design his whole system of records and reports etc., with this end in view. He must know and understand the problems faced in the process of production, and try to translate them into financial implications so that correct decision may be taken.

8)      8. Authority and responsibility should be clearly defined if the costing system is to be successful. There should be no ambiguity, everything should be clear.

To sum up, a cost system should be perfect in a manner that will enable cost of sales to be computed : provide means for valuing inventories : aid in the control and management of a company, measure the efficiency of men, materials and machines, identity wastes collected by cost codes so as to pave the way for cost reduction, make possible inter-firm comparison, provide data for pricing and policy decision and form ia basis for the preparation of various analytical reports.

Characteristics of an Ideal Costing System

 

An ideal system of costing is that which achieves the objectives of a costing system and brings all advantages of costing to the business. Following are the main characteristics which an ideal system of costing should possess or the points which should be taken into consideration before installing a costing system.

 

(i)                 Suitability to the business.A costing system should be tailor-made, practical and must be devised according to the nature, conditions, requirements and size of the business. Any system which serves the purposes of the business and supplies necessary information for running the business efficiently is an ideal system.

(ii)               Simple and Informative. The system of costing should be simple and plain so that it may be easily understood even by a person of average intelligence. The facts, figures and other informations provided by cost accounting must be presented in the right form at the right time to the right person in order to make it more meaningful.

(iii)             Flexibility and Accuracy. The system of costing must be flexible so that it may be changed according to the changed conditions and circumstances. The system without such flexibility will be outmoded because of fast changes in business andindustry. Thus, the system must have the capacity of expansion or contraction without much changes, The data to be used by cost accounting system should be accurate otherwise it may distort the output of the system.

(iv)              Economical. A costing system in like other economic goods. It costs money just like economic goods. If the system is too expensive, management may be unwilling to pay as buyers are not willing to pay for the goods if these are expensive as compared to their utility. A costing system should not be expensive and must be adapted according to the financial capacity of the business. The benefits to be derived from the system must be more than its costs as management will be willing to install the system when its perceived expected benefits exceed its perceived expected costa In short, the system must be economical taking into consideration the requirements of the business. The cost of installing and operating the system should justify the results in order to have cost benefit analysis.

(v)                Comparability. The costing system must be such so that it may provide facts and figures necessary to the management for evaluating the performance by comparing it with the past figures, or figures of other concerns or against the industry as a whole or other departments of the same concern.

(vi)              Capability of presenting information at the desired time. The system must provide accurate and timely information so that it may be helpful to the management for taking decisions and suitable action for the purpose of cost control.

(vii)            Support from Management. Necessary cooperation and participation of executives from various departments of the concern is essential for development of a good system of cost accounting Moreover, management should have faith in the costing system and should also provide a helping hand for its development and success

(viii)          Precise Information. The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.

(ix)              Procedure. A carefully phased programme analysis for the introduction of the system, should be prepared by using network.

(x)                Minimum changes in the existing set up. The existing system of delegation and division of authority and responsibility must not be disturbed with the costing system. As far as possible the system must be such so that it may least disturb the existing organisational set up.

(xi)              Uniformity of forms. All forms and proformas etc. necessary to the system should be uniform in size and quality of paper. Higher efficiency can be obtained by using colour of the paper to distinguish different forms. Printed forms should contain instructions as to their use and disposal. Forms should be suitably designed for collection and dissemination of cost data.

(xii)            Minimum clerical work. The filling of the forms by foremen and workers should involve as little clerical work as possible as most of workers are not well educated. To ensure reliable statistics, every original entry should be supported by an examiner's signatures

(xiii)          Efficient system of material control. There should be an efficient system of stores and stock control as materials usually account for a greater proportion of the total cost. A good method of pricing material issued to production should be followed

(xiv)          Adequate wage procedure. There should be a well-defined wage procedure for recording the time spent by workers on different jobs, for preparing the wage sheets and for the payment of wages. Thus the introduction of well-defined wage system will help to control the cost of labour.

(xv)            Departmentalization of expenses. A sound plan should be devised for the overheads order ascertain, collection, allocation, apportionment and absorption of overheads in order to ascertain cost accurately.

(xvi)          Reconciliation of cost accounts and financial accounts. If possible the cost accounts and financial accounts should be interlocked into one integral accounting scheme. In this is not possible the systems should be so devised that the two sets of accounts are capable of easy reconciliation.

(xvii)        External factors. The installation of a costing system mainly depend on internal factors of a firm, but external factors may also affect the structure of the system. For example, cost accounting rules applicable to certain industries as notified by the Central Government require certain cost information to be developed and included in the books of ccounts. Therefore, an ideal system of costing should take care of internal as well as external factors.

(xviii)  Duties and responsibilities of the cost accountant. Under a good system of cost accounting the duties and responsibilities of the cost accountant should be clearly defined. The cont accountant should have access to all works and departments.

(xix)     Trust. Management should have faith in the costing system and should also provide a helping hand for its development and success.

To conclude, primary criterion for an ideal costing system is : How well it helps in achieving management goals in relation to its cost ?