Cost Accounting: Installation of Costing System

The need and importance of the installation and the organisation of a good system of cost accounting are being increasingly realized presently all over the business versatility. The common experience of enthusiastic youths climbing the business – tree and falling mid-way without even collecting the leaves owes to the ignorance of he use installation and organisation of costing system, and to the infatuation that the profits could be earned without it. A good system is the key-point governing, the mechanism of an enterprise in the field of cost control, ascertainment of profitability, and managerial decision-making.

Installation of a costing system is not an expense but an investment as the rewards are much greater than the expenses incurred. The cost system is for the business and not the business for a system of cost. Therefore, the system has to be so designed as to meet the specific needs of the enterprise.

General Consideration for Installing Costing System

The general considerations to be observed in the installation a costing system are as follows:

  1. The Objective: Whether the objective of installing the costing system is limited to a specific area, e.g. material management, or fixing selling price or to arrive at a certain managerial decision; or the object is to install the system for covering all the aspects of cost affecting the business. The approach to install the system will be dependent on its objectives.
  2. The Area of Operation: Having decided the objective, the areas of operation of the system are to be studied, by which the management can be best benefited. If production is slack, attention will have to be paid to increase it; if production is good but the sales are receding, study will be made to increase the sales and action taken according to the results of study and analysis. Such areas which require immediate attention are to be carved out on priority basis to be handled by the cost system,
  3. The Organisation of the Business: No system of cost installation would succeed until the organisation structure of the business is taken into account. The organizational part would help to determine the scope of working and improvement. If the interests of management call for certain minor changes in the organizational structure, to its advantage, the same may have to be done.
  4. The Conception & Reception of the Idea: The idea of the installation of the cost system is to be placed before the staff and the workers in a manner that it is well received and not objected to on flimsy grounds. The success of the system would depend on the cooperation of he persons engaged in the enterprise, and the cooperation will be forth coming only if the idea and plans are well conceived and received. The benefits of introducing the system to all the sections should be well explained.
  5. Collection of Data & Prompt Information: The cost data works as a base for decision-making. There should be evolved a proper system for the collection of the required cost data and information promptly. Secondly, there should be a system to verify the correctness of the data supplied, otherwise the conclusions drawn would be wrong and time spent in its working would go waste.
  6. Cost Records & Cost Books: The maintenance of cost records and cost books depends on the size and nature of the business, but the basic requirements. The manner in which the financial accounts could be interlocked into an integral accounting system has to be studied and worked out. Decision has to be taken if two separate set of books-one for financial accounts and other for cost accounts-have to be maintained and thereafter the results are to be reconciled. Proper books and records are to be kept and maintained to meet the requirements of either of the two situations mentioned above.
  7. Control system for the Elements of Cost: System would have to be devised for recording and controlling costs of materials, labour and overheads, in accordance with costing principles and procedures.
  8. Type and Method of Costing: The choice of method of costing would depend on the nature of production, e.g., Job Cost method or the Process Cost method. For cost control, standard costing along with budgetary control may have to be selected and applied. Similarly, for decision making, Marginal and Differential costing techniques may be found useful. Preparations for the application of the particular method and technique/type should be made initially.
  9. Responsibility Accounting: Responsibility accounting is a technique of cost control by delegating, etc., known as responsibility centers. Its has to be judged whether a particular official who had been assigned a particular function, has implemented the same or not within the time allotted to him, or not, and thus the responsibility has got to be fixed for failure-action on individual persons, for the sake of control of cost. For this purpose, a system of responsibility accounting should be evolved.

Specific Considerations for Installing Costing System

The specific considerations as distinct from general considerations to be kept in view while the installation of costing system are as follows:

  1. Size and Nature of Business: In a business of big size, a detailed cost system is necessary while in a small business, the system should be within the requirements so that the expenses on the installation and its working may not out-weigh the utility. The cost system is good for business engaged in manufacturing or in service-rendering concerns but for others. Even in production enterprise like colliery where the production costs are all direct costs, the financial where the production costs are all direct costs, the financial accounts may be so designed as to obviate the need of any cost system, unless otherwise called for.
  2. Products: the nature of product determines the method of costing to be applied. If the material content of the product is more valuable, the material cost records need be kept in comparatively more elaborate manner so as to make material cost control effective. Same is the position with regard to labour and overhead.
  3. Organisation: The organizational set up for a costing system should be modelled that the control part is exercised by the Cost Accountant, as such; the present organizational set up of the costing department need close study to suggest necessary changes.
  4. Functional study: The functional divisions of an undertaking based on cost are a) Manufacturing, b) Administration, and c) Selling & Distribution. A study of the present working of the different departments in necessary to suggest improvements.

Principles for Smooth Working

The following principles should be kept in mind while introducing the cost system:

  1. The system should be simple and easy to operate.
  2. The system should be flexible, so that it may be expanded or contracted per needs of the business.
  3. The existing pattern should be disturbed only as little as may be considered desirable.
  4. The desired changes be introduced gradually and not in haste.
  5. Confidence be created by the Cost accountant in the minds of management and
  6. Executives regarding the utility of the system, so as to avoid unnecessary criticism
  7. And to obviate obstacles.

Line of Action

The following line of action is recommended for the installation of cost system.

  1. Determination of the type of costing and the method of costing, as may be suitable for the undertaking.
  2. To prepare forms, card, report-performs books etc., for keeping records of all the elements of cost, viz., material, labour and overheads.
  3. To decide issues regarding material cost control, i.e., purchase, storing, issue and valuation.
  4. To decide matters regarding labour cost control, i.e., job evaluation, merit rating, appointment, time recording, division of work, remuneration of labour and other allied problems like idle time, overtime, labour turnover, casual workings, etc.
  5. Where the work is carried on more by machines, proper records be kept for the machines.
  6. To suggest a suitable system for the collection, classification and analysis of all.
  7. Types of overheads, i.e., manufacturing, administrative, and selling & distributive.
  8. To decide the methods of allocation and apportionment of overheads among the production departments and Service departments which should be earlier clearly demarcated, and to decide the method of absorption of overheads.
  9. To decide normal capacity of production and prepare budgets and standards.
  10. To maintain books of cost control based on double-entry principle.
  11. To devise information system by which the costing department may communicate to other departments and receive reports and other necessary information’s promptly.

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