Essential Factors to be Considered for Designing a Cost Accounting System

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

For ensuring the efficient and successful operation of the cost accounting system, certain factors are to be given due consideration while designing such a system. These factors may be given as follows:

(i) Technical Details of the Business:

All the technical details of the business concern, its organizational structure, manufacturing procedure and process, selling and distribution procedure and type of cost information should be thoroughly understood.

(ii) Selection of the Suitable Costing Technique:

A suitable technique for the ascertainment of cost of products should be selected. Cost can be
ascertained by the techniques of standard costing or actual costing, marginal costing or absorption costing.

(iii) Suitable Method of Pricing out Materials:

For the purpose of ascertaining the true cost of materials consumed in the manufacturing process, there should be a suitable method of pricing out materials issued to production e.g., Actual Cost Price Method (First-in-First-Out or Last-in-First-Out) Average Cost Method, Market Price Method, etc.

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

A suitable method of wage payment keeping in view the nature of the product should be devised. Wages may be paid on the basis of Time Rate System, Piece Rate System or Incentive Plans. Further, a suitable method for the analysis of the time of the direct labour on various jobs, work-orders etc., should be devised so that true labour cost of each job, work-order, etc., may 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. For the purpose of ascertaining the proper share of a product in the total amount of overhead, a sound plan for the collection, allocation, apportionment and absorption of overhead should be devised.

(vi) Methods of Treatment of Wastage, Scrap and Idle Time:

Manufacturing process in a busines concern may involve wastage or loss of materials, scrap of materials and idle time of men and machines. The management should decide the ways in which the cost of wastage of materials, cost of materials scrapped and the cost of idle time are to the treated.

(vii) Designing Suitable Forms:

Cost accounting system involves the collection and dissemination of cost data. For efficiency and accuracy in the collection and dissemination of cost data, use of printed forms is made. These forms have to be suitably designed keeping in view the requirements of the business concern.

(viii) Introduction of Budgetary Control Technique:

From the view point of measuring the efficiency of performance, technique of budgetary
control is introduced so that actual performance may be compared with budgetary figures.

Practical difficulties in the installation of costing system:

The management, while installing a costing system, apart from technical costing problems, has to face certain practical difficulties which are:
(i) Suspicion of employees and lack of co-operation from other executives.
(ii) Lack of interest in cost reduction due to absence of cost-consciousness among executives.
(iii) Improper and inefficient completion of forms and their submission as such to the cost office.
In order to overcome these difficulties, the management should make efforts to win the confidence of the workers by educating them about the advantages of the costing system before introducing the same. Regular meetings of executives and supervisory staff should be convened so as to educate them as to how the costing system is going to assist them in discharging their duties properly. After installing the costing system, continuous check over the progress of the system should be kept. Only the continuous efforts on the part of management and cost accountant can ensure the success of costing system.

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