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Thursday, March 25, 2010

Installation of Costing System

The installation of a costing system requires careful consideration of the following two interrelated aspects:
·         Overcoming the practical difficulties while introducing a system
·         Main considerations that should govern the installation of such a system
Practical Difficulties
The important difficulties in the installation of a costing system and the suggestions to overcome them are as follows:
a. Lack of Support from Top Management
Often, the costing system is introduced at the behest of the managing director or some other director without taking into confidence other members of the top management team. This results in opposition from various managers as they consider it interference as well as an uncalled check of their activities. They, therefore, resist the additional work involved in the cost accounting system.
This difficulty can be overcome by taking the top management into confidence before installing the system. A sense of cost consciousness has to be instilled in their minds.
b. Resistance from the Staff
The existing financial accounting staff may offer resistance to the system because of a feeling of their being declared redundant under the new system.
This fear can be overcome by explaining the staff that the costing system would not replace but strengthen the existing system. It will open new areas for development which will prove beneficial to them.
c. Non-Cooperation at Other Levels
The foreman and other supervisory staff may resent the additional paper work and may not cooperate in providing the basic data which is essential for the success of the system.
This needs re-orientation and education of employees. They have to be told of the advantages that will accrue to them and to the organization as a whole on account of efficient working of the system.
d. Shortage of Trained Staff
Costing is a specialized job in itself. In the beginning, a qualified staff may not be available. However, this difficulty can be overcome by giving the existing staff requisite training and recruiting additional staff if required.
e. Heavy Costs
The costing system will involve heavy costs unless it has been suitably designed to meet specific requirements. Unnecessary sophistication and formalities should be avoided. The costing office should serve as a useful service department.
Main Considerations
In view of the above difficulties and suggestions, following should be the main considerations while introducing a costing system in a manufacturing organization:
1. Product
The nature of a product determines to a great extent the type of costing system to be adopted. A product requiring high value of material content requires an elaborate system
of materials control. Similarly, a product requiring high value of labor content requires an efficient time keeping and wage systems. The same is true in case of overheads.
2. Organization
The existing organization structure should be distributed as little as possible. It becomes, therefore, necessary to ascertain the size and type of organization before introducing the costing system. The scope of authority of each executive, the sources from which a cost accountant has to derive information and reports to be submitted at various managerial levels should be carefully gone through.
3. Objective
The objectives and information which management wants to achieve and acquire should also be taken care of. For example, if a concern wants to expand its operations, the system of costing should be designed in a way so as to give maximum attention to production aspect. On the other hand, if a concern were not in a position to sell its products, the selling aspect would require greater attention.
4. Technical Details
The system should be introduced after a detailed study of the technical aspects of the business. Efforts should be made to secure the sympathetic assistance and support of the principal members of the supervisory staff and workmen.
5. Informative and Simple
The system should be informative and simple. In this connection, the following points may be noted:
(i) It should be capable of furnishing the fullest information required regularly and systematically, so that continuous study or check-up of the progress of business is possible.
(ii) Standard printed forms can be used so as to make the information detailed, clear and intelligible. Over-elaboration which will only complicate matte$ should be avoided.
(iii) Full information about departmental outputs, processes and operations should be clearly presented and every item of expenditure should be properly classified.
(iv) Data, complete and reliable in all respects should be provided in a lucid form so that the measurement of the variations between actual and standard costs is possible.
6. Method of Maintenance of Cost Records
A choice has to be made between integral and non-integral accounting systems. In case of integral accounting system, no separate sets of books are maintained for costing transactions but they are interlocked with financial transactions into one set of books.
In case of non-integral system, separate books are maintained for cost and financial transactions. At the end of the accounting period, the results shown by two sets of books are reconciled. In case of a big business, it will be appropriate to maintain a separate set of books for cost transactions.
7. Elasticity
The costing system should be elastic and capable of adapting to the changing requirements of a business.
It may, therefore, be concluded from the above discussion that costing system introduced in any business will not be a success in case of the following circumstances:
1.      If it is unduly complicated and expensive
2.      If a cost accountant does not get the cooperation of his/her staff
3.      If cost statements cannot be reconciled with financial statements
4.      If the results actually achieved are not compared with the expected ones

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