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

Installation of a Costing System

A cost accounting system is a system that accumulates costs, assigns them to cost objectives and reports cost information. It ascertains product profitability and helps management in planning and control of business operations.

A system has to be designed to suit the needs of an organisation. Costing can be employed in any industry whether it is manufacturing industry or other industries like public utility, public services, construction companies, agriculture, mining etc.

As a system designer, the cost accountant should be able to perceive the needs of the management at various levels and design such a system as will meet those needs promptly, effectively and efficiently. The “needs” are concerned with the following:

1. The objective: The system will naturally differ according to what is expected from the costing system. The system will be simple if the objective is merely to fix prices; it will have to provide detailed information if the aim is to measure efficiency, control, etc. If the law requires installation of the costing system, the legal requirements must obviously be kept in mind.
2. Decision-Making Points: The levels of management which require information will determine the quantum and format of information that the costing system will have to provide. The periodicity of the various reports will be similarly determined.
3. Significant Operations: Costing must obviously pay greater attention to those areas which account for the bulk of expenditure. Mostly, it is production but, in quite a few cases, selling and distribution, accounts for greater expenditure than production; in such a case the system must devote greater care to selling and distribution.
4. Uncontrollable Items: Sometimes the law provides for a certain course of action; for example sugar must be packed in new gunny bags. Costing must not try to change this. Sometimes managements may decide to adopt a particular course for various reasons, for example, purchasing an item only from a particular firm. Obviously, it will be no use trying to alter this.

To install a sound costing system in an organisation is not an easy task. The costing for each firm must be so designed as to meet its earlier needs. It should be ensured first that the following pre-requisites for installing a sound costing system are present in the organisation:

1. The organisational set up should be clear cut regarding authority and responsibility of different individuals.
2. The management of the organisation should extend full support to the system.
3. The co-operation of the members of the staff and of the workers in general should be ensured. They should have the real spirit and enthusiasm to operate the system.
4. If financial records can yield all the necessary costing information, it is not necessary to have a separate costing department. Usually, however, a separate costing department is essential or desirable but its strength will depend upon the needs of the management and the volume and complexity of transactions or events to be recorded and handled.

The following are the essential considerations which would govern the installation of a sound costing in an organisation in general:

Executive Side: The memorandum and articles, organisation chart, delegation of powers etc.

Accounting Side: Financial accounting records, last audited accounts etc.

Internal Control Side: The existing forms, registers, number of copies etc.

Technical side and Others:

1. The size, layout and organisation of the factory should be studied.
2. The methods of purchase, receipt, storage and issue of materials should be examined and modified if necessary.
3. The method of paying wages should be studied.
4. The management requirements and their attitude towards cost accounting should be kept in view.
5. The cost of installing and operating the system should be economical.
6. The nature, method, process and stages of production, the quantities and qualities of each product should be examined.
7. The system should suit the organisation.
8. Forms and records should involve minimum clerical work and cost.
9. The system should enable prompt reporting to the various levels of management.
10. The system should so designed that cost can be effectively controlled.
11. The staff in the cost accounting department should have the ability to produce required cost data. The persons using the reports should be able to understand and use the information.
12. The adoption of cost accounting systems and practices followed by other firms in the industry facilitates inter unit and inter-firm comparisons.
13. A suitable unit of cost should be selected so that the cost is meaningful. For example, in a steel mill, the unit is “tonne” and in a company producing refrigerators, the unit is each refrigerator. In a transport company, the unit is “tonne-km” i.e., the effort in hauling one tonne of goods for one kilometre.
14. External factors e.g. government regulations affect the frequency, volume and structure of the cost accounting system.

Any proposed changes should suit other departments and should dislocate production schedule. Other points to be noted are :

1. Accuracy: Cost accounts must be accurate and correct otherwise they will prove to be misleading.
2. Equity: Allocation of indirect expenses to a particular class of output, department or job should be fair and equitable.
3. Simplicity: As cost accountants are highly analytical, there is a tendency towards complexity. Needless, elaboration should be scrupulously avoided and care must be taken to keep them as simple as possible. Careful choice should be made of the cost unit i.e. the quantity for which cost will be computed e.g. a tonne of steel, a kg. of yarn etc.
4. Elasticity: The cost accounting system should be elastic and capable of adapting itself to altered circumstances.
5. Comparability: The records must be maintained in such a manner that the result of one period can be compared with the results of any other period. The records of the past must act as a guide for the future.
6. Promptness: Prompt recording of the relevant figures in analytical form is the sine qua non of costing. Arrangements should be made for the prompt supply of records by the various departments relating to raw material, stores, labour etc., and the data thus obtained, are promptly analysed and recorded.
7. Observance of instructions: The costing staff must carefully obey the instructions given to them and even slight deviations must be permitted.
8. Periodical results: In order to derive maximum benefit, it is advisable to have the results prepared periodically so that actual cost can be compared with estimated costs.
9. Reconciliation with financial accounts: The whole system should be so maintained as to make reconciliation with financial accounts easy and simple.

Practical Difficulties in Installing a Costing System

1. Lack of support from top management: Many a times, the cost accounting system is introduced without the support of the top management in all the functional areas. Even managing director or chairman often introduces such system without consulting the departmental heads. This results in opposition from the various managers as they consider it is an interference on their activities.
2. Resistance from the existing staff: The existing financial accounting staff may offer resistance to the cost accounting system because of a feeling of their being declared redundant under the new system.
3. Non-cooperation at other levels of organisation: The foreman, supervisors and other staff may also resent the additional paper work and may not co-operate in providing the basic data which is absolutely essential for the success of the system.
4. Shortage of trained staff: There may be shortage of cost accountants to handle the work of cost analysis, cost control and cost reduction. The work of the costing department can not be handled with the availability of trained staff.
5. Heavy costs: The costing system will involve heavy costs unless it has been suitably designed to suit specific requirements.

To overcome this difficulties the following points are suggested:

1. Before the installation of a costing system, there must be firm commitment to the system on the part of the top management.
2. The existing accounting staff should be impressed about the need to supplement the existing financial accounting system.
3. The employees should be properly educated regarding the benefits which can be obtained from such a system.
4. The existing staff working in the accounts department must be properly trained in costing methods and techniques.
5. The costing system should be installed and operated according to the requirements of a specific case, so that it may not entail heavy cost to the organisation.
6. There should be proper supervision after installation and continuous efforts on the part of the cost accountant to make the system successful and to achieve the desired objectives.

Role of Cost Accountant in Decision Making 

The outlook of modern business is such that all enterprises-whether large or small, manufacturing or nonmanufacturing, public or private, profit or nonprofit-require a wide variety of cost data in making day-to-day operating decisions. Thus, for the modern cost accountant, the positive emphasis on analysis and interpretation) requires involvement in the dynamic phase of business-the current period and the future. The dynamic phase is concerned primarily with planning (i.e., selecting objectives and the means for their attainment) and controlling (i.e., achieving conformity to established plans). Cost Accountants collect, assimilate, collate and analyse all financial information related to an organization. Their main role is to ensure that managerial decisions are within cost prescriptions. They need to give a prediction about financial performance of any project. For this cost accountant considers many factors such as the cost of raw material, labour, transport and overheads, among others. He will be responsible for planning and executing effective management information and control systems, inventory control incorporating mathematical models, investment analysis, project management, internal audit, cost audit etc.

Cost Accountant plays one of the most important roles in the organization

Cost accountant analyst performs one of the most important roles in the entire organization. It is really imperative that the companies pay a great emphasis on the job of an accountant analyst. Cost accountancy deals with the preparation of the various reports for the knowledge of the internal stakeholder.

All the decisions that are taken by the company management regarding the future of the company are based on the financial reports that are prepared by the cost accountants. Cost Accountant performs action as under:
1. To analyze material, labour and the overhead expenses
2. To reconcile daily productions with accounting transactions
3. To coordinate with R&D for production of new items
4. To Assist the controller in developing cost improvement opportunities
5. To prepare the new product costing as well as do the gross profit analysis for the marketing in order to determine the feasibility and profitability before presenting the samples and pricing to the customers.