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What is Installation of a Costing System | Conditions and Factors

Installation of a Costing System
Installation of a Costing System

Installation of a Costing System

Installation of a Costing System It is fact that a common co accounting system cannot be installed for all types of business undertakings The cost accounting system depends upon the nature of business and the product manufactured.

Before a suitable system of cost accounting is installed it is necessary to undertake a preliminary investigation so as to know the feasibility of installing cost accounting system to such business Whirled introducing a costing system it should be borne in mind that costing system must suit the business.

There should not be any attempt to make the business suit the system. One more consideration that is of practical importance is that the benefits derived from costing system must be more than the investment made on it.

This means the system must be simple and it must lead to savings through the control of materials, labor and overheads when compared to expenses incurred in maintaining it.

For the successful functioning of the costing system, the following conditions are essential to be kept in mind.

(i) There must be an efficient system of material control.

(ii) A sound method of wage payment must be set up.

(iii) There must be a sound basis for collection of all indirect expenses and a basis for it apportionment to various production departments.

(iv) The duties and responsibilities of cost accountant must be made clear.

(v) Printed forms should be used so as to facilitate quick compilation of cost reports.

(vi) The integration of cost and financial accounts to facilitate reconciliation of profit as shown by cost accounts and financial accounts.

Factors to be taken into Consideration before installing a Cost Accounting System – The following factors should be taken into consideration before installing a cost accounting system:

1. History of Business Unit

Before installing a cost accounting system in a business, its history must be gone through. The history of a business unit refers to the duration of its existence, the rate of growth. policy and philosophy of management and the like.

The history of business unit serves as the basis for designing the cost accounts in respect of necessity. simplicity and investment involved in installing cost accounts.

Also Read- What is Cost Concepts and Different Terms of Costs

2. Nature of Business Unit

The installation of cost accounting system depends upon the nature of business such as manufacturing, trade mining etc. Similarly, the type of produce manufactured also determine the method and method of costing that can be applied universally costing that is to be employed.

In other words, there is no all purpose technique and method of costing that can be applied universally.

3. Object of Business Unit

The costing system will be simple if the objective of the business is only to determine cost but it will have to be elaborate if the objective is to have information which will help the management in

exercising control and taking decisions.

4. Range of the Product

The range of products manufactured and sold also determines the method of costing to be selected Accordionist range of products, must be analyzed in terms of size models, fashions, are of market competitors and whether the products are made to customers specification of for stocking and selling.

5. Area of Control to be exercised

The areas where cost controls to be exercised is to be identified so that each manager may take action relevant to his activities.

If material control occupies significant area of control it must be given top most priority for exercising control over materials.

6. Organizational factors

The problem of installing cost accounting is some what difficult in case of an existing business when compared to new business. However, the existing set up of the organization should be least disturbed should the need arise.

In order to fix up responsibility to the executives it may be necessary to group the department.

Also Read – Advantages and Disadvantages of Cost Accounting|

The organizational factors to be considered are:

(i) Size and the type of organization such as line, line and staff, functional committee organization.

(ii) The level of management item., top level middle level and bottom

and level management.

(iii) Extent of delegation and responsibility.

(iv) Extent of centralization and decentralization.

(v) Extent of departmentation.

(vi) Extent of modern office equipment’s.

(vii) Number of managerial and supervisory staff.

7. Technical Considerations

Technical considerations that influence the installation of cost accounts are as follows:

(i) Size and layout of the factory.

(ii) Flow of production.

(iii) The existence of production and service departments.

(iv) Existence of Laboratories.

(v) Production control techniques.

(vi) Inspection and testing of materials and finished goods.

(vii) Capacity of machines and degree of mechanization.

(viii) Internal transport and material handling equipment’s.

8. Selling and Distribution Method

The chief factors to be considered with regard to distribution process are the warehousing facilities, external transport, market research and other promotional measures, terms or sale and procurement orders from customers.

9. Practical Considerations

The cost accounting system to be installed must be flexible in operation and must be capable of adaptation to changing conditions.

The system must be periodically scrutinized so as to make necessary changes owing to development in business.

10. Use of Electronic Data Processing

In modern days it has become a common practice to use electronic data equipment’s and computers. In this situation it is essential to ensure that the equipment meets the needs of the system but not the way round.

11. Uniformity

The practice of adopting uniform costing facilities inter-firm comparison among various firm belonging to the same industry. Further it also has the benefit of adopting commons costing practice if a holding company has number of subsidiaries.

12. Reporting

The cost accounting system to be installed must ensure frequency and promptitude in reporting cost data to all levels of management. It must also to be pointed out that duplication of reporting is to be avoided. Further only those information which are relevant to the management in a particular context alone should be reported.

Related Links

Meaning of Cost Accounting | Nature and Scope of Cost Accounting

Cost Accounting | Purpose or Functions of Cost Accounting

Advantages and Disadvantages of Cost Accounting

Difference between Cost Accounting and Management Accounting

What is Cost Concepts and Different Terms of Costs

What is concept of Cost Audit | Objective and Scope of Cost Audit

Advantages and Disadvantages of Cost Audit

Meaning of Methods of Cost | Basic Methods of Costing

What is meaning of Classification of Cost & elements of Cost | rules of Cost Accounting Standard


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