Installation of Costing system | Cost Accounting - B Com PDF Download

 Page 1


INSTALLATION OF A COSTING SYSTEM
Before introducing a system of costing, it would be advisable to conduct a preliminary investigation to 
assess the exact requirements of the business in respect of: (a) product, (b) organization, (c) 
manufacturing process, and (d) selling and distribution methods. Moreover, it should ensure that,
(i) the existing organization is disturbed to the minimum; 
(ii) the system is implemented gradually; 
(iii) the process of costing designed for the organization is compact and goes into meaningful details 
only; 
(iv) the procedure is simple and economical to operate; and 
(v) the system is able to generate periodical reports to various levels of management. 
The two other aspects which need a proper assessment before the installation of a system of costing 
are: 
(1) What are the major objectives of costing in the business? For example, whether it is being 
introduced for fixing the prices or for instituting a system of cost control, or for both. 
(2) What are the practical difficulties in the process of introduction of the system?
Possible Difficulties
We must be conscious of the difficulties in introducing the system of costing and that they have to be 
overcome. These difficulties usually are:
(1) Inadequate support from top management and opposition to the system by some officers. 
(2) Resistance from staff associated with the operation of the financial accounting system. 
(3) Resentment at other levels in view of the additional work expected due to the costing system. 
(4) Shortage of trained and qualified staff to handle the new system. 
(5) Heavy costs involved in the process of installation. 
Factors to be Considered
The following factors should be considered before the installation of a system of costing:
(1) Objective of the costing system. 
(2) Nature of the business. 
(3) Quality of the management. 
(4) Size and type of organization, scope of authority, sources of information and reports to be 
submitted. 
(5) Technical aspect of the business. 
(6) Attitude and behavior of the staff in extending co-operation to the system and the organization. 
(7) Impact of different operations on variable expenses. 
(8) Manner of reconciliation between cost and financial accounts and the possibilities of developing 
them into an integrated system of accounting through control accounts. 
(9) Quantum of information needs and the process of collecting the data without much labour. 
(10) Nature of the product and the type of costing system which will suit the product. 
(11) Extent to which the importance of the system can be appreciated by the supporting staff and an 
awareness created among them about the relevance of regular data collection.
Page 2


INSTALLATION OF A COSTING SYSTEM
Before introducing a system of costing, it would be advisable to conduct a preliminary investigation to 
assess the exact requirements of the business in respect of: (a) product, (b) organization, (c) 
manufacturing process, and (d) selling and distribution methods. Moreover, it should ensure that,
(i) the existing organization is disturbed to the minimum; 
(ii) the system is implemented gradually; 
(iii) the process of costing designed for the organization is compact and goes into meaningful details 
only; 
(iv) the procedure is simple and economical to operate; and 
(v) the system is able to generate periodical reports to various levels of management. 
The two other aspects which need a proper assessment before the installation of a system of costing 
are: 
(1) What are the major objectives of costing in the business? For example, whether it is being 
introduced for fixing the prices or for instituting a system of cost control, or for both. 
(2) What are the practical difficulties in the process of introduction of the system?
Possible Difficulties
We must be conscious of the difficulties in introducing the system of costing and that they have to be 
overcome. These difficulties usually are:
(1) Inadequate support from top management and opposition to the system by some officers. 
(2) Resistance from staff associated with the operation of the financial accounting system. 
(3) Resentment at other levels in view of the additional work expected due to the costing system. 
(4) Shortage of trained and qualified staff to handle the new system. 
(5) Heavy costs involved in the process of installation. 
Factors to be Considered
The following factors should be considered before the installation of a system of costing:
(1) Objective of the costing system. 
(2) Nature of the business. 
(3) Quality of the management. 
(4) Size and type of organization, scope of authority, sources of information and reports to be 
submitted. 
(5) Technical aspect of the business. 
(6) Attitude and behavior of the staff in extending co-operation to the system and the organization. 
(7) Impact of different operations on variable expenses. 
(8) Manner of reconciliation between cost and financial accounts and the possibilities of developing 
them into an integrated system of accounting through control accounts. 
(9) Quantum of information needs and the process of collecting the data without much labour. 
(10) Nature of the product and the type of costing system which will suit the product. 
(11) Extent to which the importance of the system can be appreciated by the supporting staff and an 
awareness created among them about the relevance of regular data collection.
Success of the Costing System
The requisites of an effective system of costing are as follows:
(1) It suits the nature and requirements of the business. 
(2) It is simple and easy to operate. For this purpose, standard forms should be used and the 
objective of every record and report should be clear to all concerned. 
(3) It receives full cooperation of the staff. 
(4) It ensures promptness and regularity in flow of required information for the preparation and 
presentation of costing reports. 
(5) It is closely linked with the financial accounting system and makes it easier to reconcile the results 
obtained by cost accounts and financial accounts. 
(6) It contributes to cost control effectively. 
(7) It provides for comparison of estimates with the actual results. 
(8) There is considerable amount of flexibility in the system so that it can easily adjust with the 
changing conditions or requirements of the business. 
(9) The cost of installation and operation of the costing system is justified by the benefits derived from 
the system.
Thus, the system of costing proposed to be installed in an organization must be properly planned and 
introduced carefully so that it is competent enough to deliver the desired results. Much depends upon 
the manner in which the system operates so as to derive its best advantage.