Essentials of a Good Cost Accounting System - Cost Management | EduRev Notes

Cost Management

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Essentials of Good Cost Accounting System:

A good Costing System will consist of the following characteristics:

(a) The Costing System adopted in a particular organization must suit its nature and size of business and its information needs.

(b) The Costing System must be economical to the organization and the benefits derived from the system should be more than its cost of installation and operation.

(c) The system should be more flexible enough to take care of changing business situations and information needs of the organization.

(d) The system should be simple to understand and easy to operate. The users of costing data should be convinced of the Costing System from which the data is derived.

(e) The Costing System should be devised with the coordinated efforts of all the concerned departments and their staff. This will reduce the difficulty in implementation of Cost System.

(f) The Costing System should ensure proper accounting for materials, labour and overheads and proper classification of transactions should be done at the level of recording.

(g) Adoption of Activity Based Costing System will increase the accuracy in allocation, appor­tionment and absorption of overheads, which leads to correct ascertainment of cost per unit of product or service.

(h) Integration of Financial Accounting and Cost Accounting Systems will avoid duplication of work. The financial and cost accounts should be interlocked together and should be reconciled periodically.

(i) The Costing System should clearly mention the details of records to be maintained and the degree of accuracy of data required.

(j) Before devising a Costing System, the need and objectives of the system should be identified.

(k) Since the Costing System is for internal control purpose, it should meet the requirements of management and its information needs.

(l) The Costing System should concentrate more on ascertaining the significant variables of the manufacturing unit which are amenable to control and affect the concern. For example, wages are amenable for control whereas marketing cost is situation oriented.

(m) Before a Costing System is devised and adopted, thorough study should be conducted on production process, methods of work, wage system, input requirements, information needs, financial accounting system etc.

(n) Wherever possible, concepts like Management by exception, Responsibility accounting etc. should be adopted into the Costing System.

(o) All forms and proforma should be adopted to minimize clerical work and formulate efficient system of material control and adequate wage procedure.

(p) The Costing System must take care of the importance of comparability of data, with previous period’s data, with competitors’ data, with industry averages.

(q) The costing system should fix-up the duties and responsibilities of Costing Department staff and the cooperation that can be sought from other functions/departments.

Essential Factors for Good Cost Accounting System:

In designing and installation of a good Cost Accounting System, the following factors should be given due consideration:

(a) The information needs of the management and the level of details needed.

(b) The frequency of the information to be provided.

(c) The factory layout and production process, method of production and type of process.

(d) The level of control to be exercised over production and cost centres.

(e) The nature of raw material and labour used in the process.

(f) The organization structure and degree of decentralization.

(g) The speed and accuracy in requirement of information.

(h) The information needs of different Cost centres.

(i) The relative size of the Cost units and Cost centres.

(j) The level of integration of Cost and Financial accounts desired.

(k) The requirement of uniformity of accounting for comparability of data with other units in the same industry.

(l) The level of mechanization and computerization needed.

(m) Standardization of records and accounting procedures and control systems.

(n) The level of application of Costing Techniques viz., standard costing, budgetary control and Marginal costing.

(o) Cost minimization without affecting the efficiency of information needs.

(p) The management’s intention and the cooperation of workers and staff needed in installation of Costing System.

(q) Implementation of proper wage system and inventory valuation, stores issues.

(r) The cost behaviour and element-wise classification of costs and selection of equitable basis for allocation, apportionment and absorption of overheads.

(s) Cost Accounting System should be simple and easy to operate.

(t) The expenses of the Costing System should commensurate with the benefits of its installation.

Practical Difficulties in Installation of Cost Accounting System:

The practical difficulties that are expected at the time of installation of Costing System, are summarized below:

1. Lack of Support from Top Management:

The basic objective of Cost Accounting System is to provide necessary information to the internal management for the purpose of problem solving, decision making and control. Without necessary support and recognition from the top management, the very purpose of Cost System is vitiated.

2. Resistance from Existing Accounting Staff:

The existing accounting staff may resist the introduction of Cost Accounting System in the organization due to fear of loosing job recognition and importance after the implementation of the system.

3. Lack of Cooperation from other Departments:

The employees of other departments may not cooperate for the installation of Cost Accounting System due to fear of increase in work load, bring-out inefficiency etc.

4. Resistance from Operating Level Workers:

The foremen, supervisors, workers and other operating level staff may resent the introduction of cost system on the ground that it will increase their job responsibilities and paper work and may fear that it may cause change in wage structure.

5. Shortage of Trained Staff:

The installation and implementation of cost system requires trained, qualified and experienced staff which may be shortage.

6. Uneconomical Cost System:

Sometimes the detailed cost system proposed to be installed may cause substantial installation and operating cost.

Suggestions to Overcome Practical Difficulties of Cost Accounting System:

The steps to be taken to avoid the above said practical difficulties while installations of a Cost System in the organization are as follows:

(a) The management should be convinced of the benefits which can derive by installation and operation of a Cost System.

(b) Non-cooperation and resistance can be overcome by explaining the simplicity and use of the system and should be ensured that the system will benefit the organization and increase its profitability. They should be given assurance that the system will not reduce the importance of existing staff.

(c) To overcome resistance, the existing staff should be properly trained to take up the responsibilities of the Costing System.

(d) All levels of staff and managers in the organization should be properly trained and made familiar with the Costing Procedures.

(e) The system should be simple to understand and easy to operate.

(f) The benefits derived from Cost System should be more than the costs incurred on its installation and operation.

(g) A qualified and experienced cost accountant should be assigned with responsibility to achieve the desired objectives of the Cost System. He should be capable of coordinating with other departments, and operating workers.

(h) The Cost System designed and installed should meet specific requirements of the concern and it should reduce unnecessary paper work of the organization.

(i) The accounting staff should be convinced that the Cost System will only supplement the Financial Accounting System and it is not going to reduce the importance of existing accounting function.

(j) Regular meetings with accounting staff and user departments will clarify all doubts about the system and eliminate ambiguity.

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