Installation of a Costing System

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Installation of a Costing System

               

As explained above, cost accounting system is a system that accumulates costs, assigns them to cost objects and reports cost information. In addition to this, a proper cost accounting system assists management in the planning and control of the business operations as well as in analyzing product profitability.

 

There are several other advantages of a well defined costing system in an organization like generating information for decision making, supplying information to the management for internal control, detailed analysis of costs like fixed costs, variable costs, controllable costs, labor costs, material costs, overheads etc. However it is necessary that the cost accounting system is properly installed in an organization.

 

Costing system installed in an organization should be simple to understand, easy to operate, highly reliable and suitable to the organization. The following factors should be taken into consideration while designing a costing system.

 

Size of the firm: - Size of the firm is an extremely important factor in designing a cost accounting system. As the size of the firm and its business grows, the volume and complexity of the cost data also grows. In such situation, the cost accounting system should be capable of supplying such information.

Manufacturing Process: - Process of manufacturer changes from industry to industry. In some industries, there may be a continuous process of production while in some batch or job type of production may be in operation. A cost accounting system should be such that the manufacturing process is taken into consideration and cost data is collected accordingly.

Nature and Number of Products: - If a single product is produced, all costs like material, labor and indirect expenses can be directly allocated to that product. But if more than one product is manufactured, the question of allocation and apportionment as well as absorption of indirect expenses ( Overheads ) arises and hence the cost accounting system should be designed accordingly as more complex data will be required.

Management Control Needs: - The designing of a cost accounting system in a business organization is guided by the management control requirements. The costing system should supply data to persons at different levels in the organization to take suitable action in their respective areas.

Raw Materials:- The designing of a cost accounting system in a business is also guided by the raw materials required for the production. The nature of raw materials and the degree of waste therein influence the designing of costing system. There are some materials which have a high degree of spoilage. The costing system should be such that identification of spoilage, keeping records of materials, pricing of the issues etc are taken into consideration.

 

Organization Structure:- The structure of the organization also plays a vital role in designing a costing system. The system should correspond to the hierarchy of the organization.

External Factors:- External factors are also important in designing of a costing system. For example, Cost Accounting Record Rules have been mandatory for certain types of industries. For the sake of compliance of the same, costing system should be designed.

 

Practical Difficulties in Installation of Costing system

The practical difficulties expected at the time of installation of costing system are given below.

               

Top Management of an organization may not give necessary support and recognition to the costing system installed in an organization. Due to lack of support, this system may not give desired results.

               

There may be resistance from existing accounting staff due to fear of losing job recognition and importance after the implementation of the system.

 

Employees of other departments may not co-operate for installation of costing system due to fear of increase in workload or revealing of inefficiency.

 

The foremen, supervisors, workers and other operating level staff may resent the introduction of costing system due to the fear on increasing of workload.

 

Shortage of qualified and efficient staff may be another difficulty in installing and operating a costing system.

 

Sometimes firms resist a costing system due to the heavy cost of installation and operating of the same. The cost may be more than the benefits of the same.