cost accounting system

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. 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 (a) There must be an efficient system of material control. (b) A sound and well designed method of wage payment must be set up. (c) The existence of sound basis for collection of all indirect expenses and a basis for its apportionment to various production departments. (d) The integration of cost and financial accounts to facilitate reconciliation of profit as shown by these two systems of accounts. (e) The use of printed forms so as to facilitate quick compilation of cost reports. (f) The duties and responsibilities of cost accountant must be made clear.

Factors to be Considered before Installing a Cost Accounting System

The following factors are to be considered before installing a cost accounting system : 1. History of business unit : The history of a business unit implies the duration of its existence,

position in the industry, 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. 2. Nature of the industry : The nature of business such as manufacturing, mining, trading, etc. determines the costing techniques to be applied. Similarly, the type of product manufactured also determine the method of 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. Product range : The range of products manufactured and sold also determine the method of costing to be selected. Accordingly range of products must be analysed in terms of size, models, fashions, area of market, competitors and whether the products are made to customers specification or for stocking and selling.

4. Technical considerations : Technical considerations that influence the installation of cost accounts are as follows : (a) Size and layout of the factory (b) The existence of production and service departments (c) Flow of production (d) Capacity of machines and degree of mechanisation (e) Existence of laboratories (f) Internal transport and material handling equipments (g) Production control techniques (h) Inspection and testing of materials and finished goods.

5. Organisational factors : The organisational factors to be considered are : (a) size and the type of organisation such as line, line and staff, functional and committee organisation, (b) the levels of management, viz., top level, middle level and bottom level management, (c) extent of delegation and responsibility, (d) extent of centralisation and decentralisation, (e) extent of departmentation, (f) availability of modern office equipments, and (g) number of managerial and supervisory staff. 6. 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 of sale and procurement of orders from customers.

7. Accounting aspects : The factors to be considered in respect of accounting are : (a)number of financial records, (b) existing forms, (c) registers used, and (d) number of copies required. 8. Area of control to be exercised : The areas where cost control is 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 topmost priority for exercising control over materials. 9. 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 for the management in a particular context alone should be reported.

10. Uniformity : The practice of adopting uniform costing facilitates inter-firm comparison among various firms belonging to the same industry. Further it also has the benefit of adopting common costing practice if a holding company has number of subsidiaries.

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

12. 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 scrutinised so as to make necessary changes owing to development in business.

REQUISITES OR ESSENTIALS OF COST ACCOUNTING SYSTEM

The following are the essentials of an ideal cost accounting system : 1. Accuracy : The system of cost accounting must provide for accuracy in terms of both cost ascertainment and presentation. 2. Simplicity : Cost accounting system involves detailed analysis of cost. To avoid complications in the procedure of cost ascertainment an elaborate system of costing should be avoided and every care must be taken to keep it as simple as possible. 3. Elasticity : The cost accounting system should be capable of adopting itself to the changing situations of business. It must be capable of expansion or contraction depending upon the needs of the business. 4. Economy : The costs of operating costing system must be less. It must result in increased benefit when compared to the expenditure incurred in installing it. 5. Comparability : The records to be maintained must facilitate comparison over a period of time. The past records must serve as a basis to guide the future.

6. Promptness : An ideal costing system is one which provides cost data in an analytical form to the management. So all the departments of a factory must analyse and record the relevant items of cost promptly in order to furnish cost information on a regular basis to various levels of management. This helps in checking up the progress of the business on a regular basis 7. Periodical preparation of accounts : With a view to facilitate the comparison of results frequently, it is desirable to prepare accounts periodically. Constant comparison of actual result with standard result enables to spot out areas of inefficiency. This can be set right by taking remedial measures. 8. Reconciliation with financial accounts : The system of cost accounts must be capable of reconciling with financial accounts so as to check accuracy of both the system of accounts. 9. Uniformity : The various forms and documents used under costing system must be uniform in size and quality of paper. Printed forms must be used to avoid delay in the preparation of reports. This also reduces the burden of clerical staff. Forms of different colours can be used to distinguish different documents. 10. Equitable : The basis of apportioning indirect expenses to products, departments or jobs must be fair and equitable.

[Link] the objective: main objective is to determine the cost [Link] information that will help the mgt in exercising control and taking decision. 2. Study the existing org and routine practice: various mater for consider in this are ,nature of the business ,lay out of the factory and manufacturing department ,method of dealing waste materials wage payment system

Practical Difficulties in Installing Cost Accounting

Following practical difficulties at the time of installation of cost accounting system : 1. Lack of support from management : Wherever costing system is installed. It is essential to seek the support of various departmental managers. Very often the managers show hostile attitude towards the costing system. They feel that this system will interfere in their routine work and probably as a means of checking their efficiency. Under such circumstances it is better to convince them about the utility of costing system for the business as a whole. 2. Resistance by existing accounting staff : the existing accounting staff resist the installation of the cost accounting system on two grounds. Firstly, they feel that the new system of accounting might lead to excess work. Secondly, they are afraid of their job security. But this difficulty may be overcome by encouraging them about the usefulness of cost accounting as a supplement to financial accounts and the generation of more employment opportunities from the installation of cost accounting system.

3. Non-cooperation from middle and bottom level management : At times the middle and bottom level managers such as foremen, supervisors and inspectors also fail to extend their cooperation fearing additional work which may be entrusted to them. This problem may be overcome by suggesting them about the simplicity of the system and the existence of a separate cost accounting department to look after costing matters.

4. Lack of trained staff : This was no doubt a problem in olden days but Today this problem is overcome, by increase The Institute of Cost and Works Accountant of India in our country which offers professional course in costing and also offers training facilities through various companies to the candidates undergoing the course. In spite of this facility, it is somewhat difficult to get the competent and experienced staff at the time of installation. This problem can be overcome by paying attractive salaries to the cost accountants.

5. Heavy expenses in installing and maintaining the system : The setting up of a separate costing department with staff often poses a problem. In addition to installation, the operating expenses in the form of printing and stationery, heating and lighting, depreciation and insurance, rent and rates are to be incurred