Installation of Cost Accounting System | Commerce & Accountancy Optional Notes for UPSC PDF Download

Installation of Cost Accounting System

• Tailoring Costing to Each Business:
  • Due to the diverse nature and size of organizations, a one-size-fits-all approach in costing doesn't work.
  • Costing principles and procedures need to be applied based on the unique characteristics and environment of each organization.
• Importance of a Properly Designed System:
  • Successful operation of an organization relies on a well-designed costing system tailored to its specific needs.
• Preliminary Investigation Before Implementation:
  • Before introducing a costing system, it's advisable to conduct a preliminary investigation.
  • Assess the organization's requirements regarding products, organization structure, manufacturing process, and selling methods.
  • Ensure minimal disruption to the existing organization, gradual implementation, simplicity, and cost-effectiveness of the new system.
  • The system should generate periodic reports for different levels of management.
• Major Objectives of Costing:
  • Determine the main objectives of costing in the business, such as setting prices, implementing cost control, or both.
• Assessing Practical Difficulties:
  • Identify and assess practical difficulties in the introduction of the costing 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: 

• Inadequate support from top management and opposition to the system by some officers.
• Resistance from staff associated with the operation of the financial accounting system.
• Resentment at other levels in view of the additional work expected due to the costing system.
• Shortage of trained and qualified staff to handle the new system. 
• Heavy costs involved in the process of installation.

Factors to be Considered 

• Objective Definition: Clearly define the objective of the costing system.
• Business Nature: Consider the unique characteristics of the business.
• Management Quality: Evaluate the quality and capabilities of the management.
• Organization Size and Type: Take into account the organization's size, type, scope of authority, information sources, and required reports.
• Technical Aspects: Assess technical aspects relevant to the business.
• Staff Attitude and Behavior: Consider the staff's attitude and willingness to cooperate with the system and the organization.
• Impact on Variable Expenses: Examine how different operations affect variable expenses.
• Reconciliation Method: Consider the reconciliation method between cost and financial accounts, exploring the potential for an integrated accounting system.
• Information Needs: Evaluate the volume of information required and the efficiency of data collection processes.
• Product Nature: Assess the nature of the product and choose a suitable costing system.
• Staff Awareness: Gauge the extent to which the staff appreciates the importance of the system and create awareness about the relevance of regular data collection.

Success of the Costing System

• Business Suitability: The system must align with the nature and needs of the business.
• Simplicity and Ease of Operation: Ensure simplicity and ease of operation, utilizing standard forms with clear objectives for records and reports.
• Staff Cooperation: Obtain full cooperation from the staff.
• Prompt Information Flow: Ensure prompt and regular flow of necessary information for the preparation and presentation of costing reports.
• Integration with Financial Accounting: Establish a close connection with the financial accounting system, facilitating easy reconciliation between cost and financial accounts.
• Effective Cost Control: Contribute to effective cost control measures.
• Estimate-Actual Comparison: Enable the comparison of estimates with actual results.
• Flexibility: Maintain a level of flexibility to adapt to changing business conditions or requirements.
• Cost-Effective Operation: Justify the cost of installation and operation by the benefits derived from the system.

In summary, an effective costing system must be carefully planned, introduced, and operated to align with business needs, ensure simplicity, garner staff cooperation, provide timely information, integrate with financial accounting, support cost control, allow estimate comparisons, maintain flexibility, and justify its cost through derived benefits. The success of the system depends on its operation for optimal advantages.