To ensure that a cost accounting system is efficient and successful, certain factors must be given due consideration when designing such a system. These factors are the following:

(i) Technical Details of the Business

All the technical details of the business, including its organizational structure, manufacturing procedures, selling and distribution processes, and type of cost information, should be thoroughly understood.

(ii) Selection of a Suitable Costing Technique

A suitable technique for ascertaining product cost should be selected. Cost can be ascertained using standard costing or actual costing and marginal costing or absorption costing.

(iii) Suitable Method of Pricing Out Materials

To determine the true cost of materials consumed in the manufacturing process, a suitable method of pricing out materials issued to production should be chosen. Examples include the cost price method (FIFO or LIFO), average cost method, and market price method.

(iv) Selection of the Method of Wage Payment and Time-Booking

A suitable method of wage payment, keeping in view the nature of the product, should be devised. Wages may be paid based on a time rate system, piece rate system, or incentive plans.

Also, a suitable method should be chosen to analyze the time required in terms of direct labor on various jobs and work orders. This will ensure that the true labor cost of each job can be ascertained.

(v) Method of Overhead Accounting

The total cost of a product or service not only comprises direct costs but also a part of the indirect costs. To ascertain the proper share of a product in the total overhead, a plan for the collection, allocation, apportionment, and absorption of overheads should be devised.

(vi) Methods of Treating Wastage, Scrap, and Idle Time

Manufacturing processes in a business may involve the wastage or loss of materials, scrap of materials, and idle time of men and machines. Management should decide how to treat the cost of wastage of materials, materials scrapped, and idle time.

(vii) Designing Suitable Forms

Cost accounting systems involve the collection and dissemination of cost data. For efficiency and accuracy, the use of printed forms is common. These forms must be suitably designed, keeping in view the business requirements.

(viii) Introduction of Budgetary Control Technique

From the viewpoint of measuring performance efficiency, budgetary control techniques are introduced so that actual performance can be compared to budgeted figures.

Practical Difficulties in Implementing a Costing System

When implementing a costing system, the management must overcome both technical costing problems and practical difficulties. The practical difficulties include:

  • Suspicion of employees and lack of co-operation from other executives
  • Lack of interest in cost reduction due to the absence of cost-consciousness among executives
  • Improper and inefficient completion and submission of forms to the cost office

To overcome these practical difficulties, the management should seek to win the confidence of its employees by educating them about the advantages of the costing system before introducing it.

Regular meetings of executives and supervisory staff should be convened so as to educate them about how the costing system will help them to discharge their duties properly.

After implementing the costing system, continuous checks should be made in terms of the progress of the system. The success of the costing system depends on the continuous efforts on the part of management and the cost accountant.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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