Cost Accounting

ESSENTIAL CHARACTERISTICS OF A GOOD COSTING SYSTEM

1) Suitable to the firm:- The costing system adopted should be
suitable one based on the nature, condition ,size and
requirements of a business firm
2) Simplicity:- The costing system should be simple and
understandable to a person of average intelligence.
3) Flexibility:- The costing system should be flexible so that it may
be changed according to changed conditions.
4) Economical:- The system should be economical. The costing
system should not be expensive and must be adopted
according to the financial capacity of a firm
5) Comparability:- The system should be capable of providing
comparable facts and figures.
6) Less clerical work:- The work connected with filling up of forms
and and preparation of statements should be as little as
possible as most of the workers are not well educated.
7) Minimum changes to the existing one:- On introducing a new
system it may require some changes in the present set up. But
the changes required should be minimum
8) Efficient system of material control:- There should be an
efficient system of material control so that there is minimum
wastage of material.
9) Effective wage system:- There must be a proper procedure for
recording the time spent by workers on different jobs ,for
preparing wage sheets and for payment of wages.
10) Uniformity of forms:- All the forms required for the
costing system should be uniform in size. The forms should be
of different columns so that they can be easily distinguishable.

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11) Departmentalisation of expenses:- A Proper plan should

be devised for the collection, allocation, apportionment and
absorption of overhead in order to ascertain the cost
accurately.
12) Reconciliation of cost and financial accounts:- If
possible, the two set of accounts ( cost accounts and financial
accounts) are prepared in such a way as for easy reconciliation.
13) Duties and responsibilities of the cost accountant:-
Under an efficient system of cost accounting , the duties and
responsibilities of the cost accountant should be clearly defined

INSTALLATION OF COSTING SYSTEM

The following factors are to be taken in to consideration before

setting up a system of cost accounting
1) Objectives:- While installing the cost accounting system, the
objectives of the system have to be finalised. If the objective
is cost determination only, then the system would be simple.
But if the objectives are materials management, control of
labour and overheads, fixing selling price, decision making
etc. then it would have to be elaborated. Thus the approach
to install the system will depend on its objectives
2) Organisational structure of the business:- A study on the
structure of the organisation, size and layout is also
necessary for installing a sound cost accounting system. This
will enable the management to determine the scope of
responsibilities of various managers.
3) Nature of product and business:- Nature of product and the
size of business decide the emphasis of cost control. A
product requiring high value of material, needs an elaborate
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system of material control. Similarly, a product requiring

high value of labour, requires an efficient time keeping and
wage payment.
4) Methods and techniques of costing:- Nature of business
decides the type of costing to be introduced. Examples are
job costing, contract costing, process costing, unit costing
etc. Job costing is used by printing press, automobile
workshops etc. where as contract costing is used by building
contractors, civil engineers etc for cost ascertainment.
Similarly, an appropriate technique of costing is to be
introduced for the purpose of cost control. Examples are
standard costing, Budgetary control etc.
5) Technical Aspects:- A detailed study of technical aspects of
manufacturing process, operations, material control, labour
control, wage distribution, factory layout, etc is of great
importance. This will be helpful in preventing wastage of
material, labour ,overheads etc and designing effective
procedures and forms.
6) Control system:- Cost accounting system is to be designed
to record and control different elements of cost in
accordance with costing procedures and principles and the
limitations imposed by the type of organisation.
7) Collection of Data:- Cost data is the basis for decision
making. An efficient system of collection and verification of
the cost data is to be devised.
8) Co-operation of staff:- The co-operation of staff is essential
for the successful operation of any costing system..
Therefore, the system should be implemented in
consultation with the staff.

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9) Cost records and books:- Before installing the costing

system it is to be decided whether separate set of cost and
financial books are to be maintained or an integrated
accounting system is to be followed. This depends on the
nature and size of the organisation and the existing
accounting system.
10) Organising the cost office:- It is advisable to have a
separate cost office which has access to the factory. The staff
in the cost office should have facilities and access to stores
and production departments.
11) Standardisation of forms:- As far as possible, the forms to
be used by the foremen, workers, materials and labour
departments, etc should be standardised. While designing
the forms, it should be ensured that minimum clerical work
is involved at all stages.
12) Relationship of cost office to other departments;-The
cost office should establish smooth working relationship
with purchase departments, stores departments, production
department and personnel department. The cost office is
expected to record, analyse and finalise all cost data and
achieve the desired level of control over costs.

PRACTICAL DIFFICULTIES IN INSTALLING A COSTING SYSTEM

1) Absence of cost consciousness:- Cost control measures

may be adversely affected due to the absence of cost
consciousness among the employees at all levels.
2) Cost of installation;- Installation of an elaborate system
of costing may involve huge expenditure which may not
be affordable to small and medium size organisations.
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3) Lack of support from senior executives and managers:-

Due to ignorance and lack of awareness regarding the
benefits of the costing system, the existing staff may feel
that they would lose their importance. Hence they may be
reluctant to introduce the new system.
4) Shortage of trained staff:- Due to non- availability of
adequate number of trained staff, cost classification, cost
analysis, cost control and cost reduction may not be
handled efficiently.
5) Resistance from employees and workers:-Lower level
employees and workers may resist the system and
suspect that it is introduced to control and hamper them
in their work.

INORDER TO OVERCOME THE ABOVE SAID PRACTICAL

DIFFICULTIES, THE FOLLOWING MEASURES MAY BE
IMPLEMENTED
1) The existing accounting staff should be given proper
training
2) The proposed costing system should be easy to follow
3) The top management and employees are to be given
adequate information about the benefits of the
costing system
4) The implementation and operating expenses of the
costing system should be kept minimum and it should
be profitable to the organisation as a whole.
5) The management should make it clear to the staff that
they would not be replaced from the organisation.

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6) The existing accounting staff should be impressed in

such a way that the new system is not competitive but
complementary to the existing system.
7) There should be proper supervision and review by the
cost accountant to make the system successful.
An ideal cost accounting system provides
sufficient and effective information to the
management at the right time to take correct
decisions. It is a tool for solving many managerial
problems.

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