Installation of Costing System: Requisites, Steps and Problems

There is no system or method of costing which can fulfill the requirements of all types of Industries.

To install the most suitable system of costing in a particular organisation, the following should be noted:

1. Essentials Requisites of a Good Costing System.

2. Steps necessary to install the system.

3. Problems or practical difficulties in installing a costing system.

4. Steps to be adopted to overcome practical difficulties.

1. Essentials Requisites of a Good Costing System:

An ideal cost accounting system provides sufficient and effective information to the management at the right time to exercise correct decisions.

Following are the essentials of a good cost accounting system:

(i) Simple to Operate:

The cost accounting system should be simple to understand and operate so that persons involved may not be confused and follow wrong procedures or methods.

(ii) Flexibility:

The cost accounting system should be flexible to adopt new requirements based on changes occurring in the enterprise due to external conditions.

(iii) Comparability:

The costing system should be able to provide comparable data. Comparison can be between the figures of two or more periods of the same firm or between the figures of the firm and those of the competitors for a particular period or periods.

(iv) Economy:

The cost accounting system should justify the cost of operation through resultant benefits. The system should be operated with least cost.

(v) Timeliness:

The system must be capable of providing appropriate information in Time for decisions relating to cost control.

(vi) Suitability to the Enterprise:

The cost accounting system devised should be suitable to the nature of business done by the enterprise and it should fulfil the requirements of the business.

(vii) Minimum Changes in Current Setup:

The existing system of Authority and responsibility, delegation etc., should not be disturbed. Changes in the organisational setup should be minimum possible.

(viii) Minimum Clerical Work:

The clerical work like filling up forms by workers and foremen should be minimum possible so that their basic work rhythm is not disturbed.

(ix) Simplicity of Forms and their Standardisation:

The forms used as part of the costing system should be minimum in number, standardised in format and simple to operate by the personnel so that required information is obtained in time.

(x) Effective System to Control Materials and Wages:

The system relating to purchase, receiving, inspection, storage and issue of materials should be effective. The method of pricing material issues should be appropriate to the situation in the firm.

The procedures for Time recording. Time booking, overtime, payroll preparation, etc. should be systematic and effective.

(xi) Procedure for Overheads:

The routine prescribed for overheads should lead to proper allocation, apportionment and absorption of overheads.

(xii) Reconciliation:

Reconciliation of cost accounting with financial accounting is to be facilitated to reveal the reasons for difference in profits.

(xiii) External Factors:

The costing system should ensure compliance of statutory and legal requirements like cost audit, cost accounting rules etc.

(xiv) Cost Accountant’s Role:

The responsibilities, and duties of the cost accountant should be clearly defined. He should have access to all the departments and divisions of the firm.

2. Steps Necessary to Install the Costing System:

The following steps have to be carefully followed to install a costing system successfully:

(i) Objectives:

While installing the cost accounting system the objectives of the system have to be finalised, like materials management, fixing selling prices, etc. The approach to install the system will depend on it; objectives.

(ii) Organisation Structure of the Business:

Organisation structure of the business determines the scope of authority and responsibility of each individual in the organisation. While installing the system, minor changes, if any, to be made in the structure for the advantage of management may be carried out.

(iii) Type and Method of Costing:

Nature of business decides the type of costing to be introduced. Examples are job costing, process costing, operating costing, unit costing, etc. For the purpose of cost control appropriate technique is to be introduced i.e., standard costing or budgetary control or any other appropriate technique.

(iv) Cost Records and Books:

It is to be decided whether separate set of cost and financial books are to be maintained or an integrated accounting system is too followed. This depends on nature and size of the enterprise and the existing accounting system.

(v) Technical Aspects:

A detailed study of technical aspects of manufacturing process, operations, material control, labour control, wage disbursement, factor layout, etc., is of great significance. This will be helpful in preventing wastage of labour, material, etc., and designing effective procedures and forms.

(vi) Control System:

Cost accounting system would have to be designed to record and control different elements of cost in accordance with costing procedures and principles and the limitations imposed by the type of organisation that exists.

(vii) Nature of Product and Business:

Nature of the product and the type of business decide the emphasis of cost control. If the material forms major part of the total cost, emphasis is laid on material control. If labour constitutes major portion of the total cost, labour is to be controlled with special emphasis.

(viii) Collection of Data:

Cost data is the basis for decision making. An efficient system of collection and verification of the data is to be devised for prompt collection of cost data.

(ix) Cooperation of Staff:

Details of the system should be explained to the staff so that the cost accounting system can work efficiently by cooperation among the staff.

(x) Organising the Cost Office:

It is preferable to have a separate cost office which has access to the factory.

The staff in the cost office should have facilities and access to:

(a) Stores – to account for receipts, issues & loss of materials

(b) Works – to account for labour Time and output.

(xi) Relationship of Cost Office to Other Departments:

All the departments with which the cost office interacts, like purchasing, production, stores etc., should be instructed by the Top management that appropriate cooperation and coordination with cost office are essential. The cost office should establish smooth working relationship with the departments concerned.

The cost office is expected to record, analyse and finalise all cost data and achieve the desired level of control over costs.

3. Problems or Practical difficulties in installing a Costing System:

In addition to the technical problems, the practical difficulties which usually arise when a costing system is proposed to be introduced are as under:

(i) Absence of Cost Consciousness:

Cost control measures may be adversely affected due to absence of cost consciousness among the employees at all levels.

(ii) Lack of Support from Senior Executives and Top Management:

Unless thoroughly convinced in advance, some senior executives and even individual members of top management may not welcome introduction of costing system under the impression that it may reduce their importance and freedom.

(iii) Suspicion and Resistance from Workers and Employees:

Lower level employees may resist the system and suspect that it is introduced to control and hamper them in their work.

(iv) Shortage of Trained Staff:

Suitably trained staff may not be readily available in the organisation to take care of different aspects and phases of a costing system.

(v) Cost of Introduction:

Introduction of an elaborate system of costing may involve huge expenditure which may not be affordable to small and medium sized firms.

4. Steps to be Adopted to Overcome Practical Difficulties:

The following measures may be implemented to overcome practical difficulties to introduce a costing system:

(i) Top Management Support:

Support from the Top management should be ensured before the decision to introduce a costing system is made. The decision should not be made by one individual who is at the top. A consensus of the senior directors, executives etc., is essential for successful introduction of a costing system.

(ii) Employee Trust and Confidence:

A broad outline of the system is to be explained to all employees concerned to gain their confidence and trust. All necessary clarifications and explanations can help to sustain morale of the staff.

(iii) Selection of Suitable System and Minimising Forms:

The costing system chosen should be suitable to the requirements of the firm. Minimising paper work by avoiding or eliminating unnecessary forms and procedures is necessary.

(iv) Training to the Staff:

Existing staff should be trained as per the requirements of the system so that it can be implemented smoothly.

In conclusion, we may say that willing acceptance of both managerial and clerical staff along with the workers ultimately decides the success or failure of a newly introduced costing system.