INSTALLATION OF COSTING SYSTEM

INSTALLATION OF COSTING SYSTEM

As in the case of every other form of activity, it should be considered whether it would be profitable to have a cost accounting system. Management of an organisation needs complete and accurate information to make decisions. A well-established Costing system should provide all relevant information as and when required by management as well as various stakeholders.

Before setting up a system of cost accounting the under mentioned factors should be studied:

(a) Objective: The objective of costing system, for example whether it is being introduced for fixing prices or for insisting a system of cost control.

(b) Nature of Business or Industry: The Industry in which business is operating. Every business industry has its own peculiarity and objectives. According to its cost information requirement cost accounting methods are followed. For example,an oil refinery maintains process wise cost accounts to find out cost incurred on a particular process say in crude refinement process etc.

(c) Organisational Hierarchy: Costing system should fulfil the information requirements of different levels of management. Top management is concerned with the corporate strategy, strategic level management is concerned with marketing strategy, product diversification, product pricing etc. Operational level management needs the information on standard quantity to be consumed, report on idle time etc.

(d) Knowing the product: Nature of product determines the type of costing system to be implemented. The product which has by-products requires costing system which accounts for by-products as well. In case of perishable or short self- life products, marginal costing is appropriate to know the contribution and minimum price at which products could be sold.

(e) Knowing the production process: A good costing system can never be established without the complete knowledge of the production process. Cost apportionment can be done on the most appropriate and scientific basis if a cost accountant can identify degree of effort or resources consumed in a particular process. This also includes some basic technical know-how and process peculiarity.

(f) Information synchronisation: Establishment of a department or a system requires substantial amount of organisational resources. While drafting a costing system, information needs of various other departments should be taken into account. For example, in a typical business organisation accounts department needs to submit monthly stock statement to its lender bank, quantity wise stock details at the time of filing returns to tax authorities etc.

(g) Method of maintenance of cost records: The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and how the results of separate sets of accounts i.e. cost and financial, could be reconciled by means of control accounts.

(h) Statutory compliances and audit: Records are to be maintained to comply with statutory requirements and applicable cost accounting standards to be followed.

(i) Information Attributes: Information generated from the Costing system should possess all the attributes of information i.e. complete, accurate, timeliness, relevant etc. to have an effective management information system (MIS).