Installation of Costing System

True Tamplin

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

Broadly speaking, the objective of any costing system should be to collect statistical data for significant operations of the undertaking, to analyze it and to make it available to the management in a suitable form with a view to assisting it in taking managerial decisions. Hence the costing system should primarily be set up for the benefit of the undertaking. Accordingly, the following general matters and conditions should be considered while introducing a costing system:

1. Objectives of Costing System:

First of all, the objectives of installing the costing system in the business concern and the expectations of the management from the system, should be determined in clear terms. The costing system may be introduced for fixing prices or for instituting a system of cost control.

2. Consideration of the Significant Variables:

It is necessary to ascertain the significant variables of the manufacturing unit which are amenable to control and affect the business unit. In some of the manufacturing units, material cost is the dominant factor. In such a case, the costing system should devote greater attention to control material cost. It can be done through effective supervision over purchasing, receiving, storing, issuing, pricing and utilizing the materials. If labour cost is the dominant factor, elaborate system has to be devised to effectively control the recruitment, preparation of labour records, and payment of wages.

3. Suitability to the Product:

The costing system to be installed must be according to the nature of the product or the manufacturing process involved.

4. Suitability to General Organisation:

The costing system should be organized in such a way that it suits the general organization of the undertaking. Costing system should be introduced without unduly altering or extending the present organization.

5. Consideration of the Technical Details of the Business:

The technical aspects of the working of the business should be taken into consideration and an attempt should be made to win the sympathetic assistance or support of the principal members of the supervisory staff.

6. Use of Standard Forms:

Printed forms should be used to record the cost data so as to reduce the clerical work and to minimize the possibility of errors.

7. Details of Cost Records:

The details in which records are to be kept should be minimum according to the requirements of the management.

8. Prompt Availability of Costing Information:

Arrangements should be made to make the costing results available to the management regularly and promptly as they are of immense help to the management in taking timely actions.

9. Degree of Accuracy Desired:

The degree of accuracy of cost data desired and the manner in which such accuracy may be verified should be determined.

10. Reconciliation of Results:

Both cost accounts and financial accounts should be inter-locked into a single accounting system or the results of separate sets of accounts, cost and financial, should be capable of reconciliation.

The Primary Objectives of Installation of Costing System

Truly speaking there is no single system which can be installed by every organization. It depends on the requirements of the management which only is competent enough to take a decision in the matter. General objectives of installation of costing system may be enumerated as given below:
(1) It should be profitable.
(2) The cost to be incurred in the installation of cost system must not exceed the benefit which is expected from such an installation.
(3) It should serve the nature of business.
(4) It should serve the quality of management and the quality which the management desires.
(5) It should make full use of the information available and should be able to provide all the information required.
(6) It should ensure the prompt and regular preparation and presentation of cost data.
(7) It should maintain the degree of accuracy desired by the management.
(8) It should be simple and easy to operate.

The Problems and Possible Solutions

1. Lack of support. The top management may not support the idea of installation of a costing system. If it is the case there is every chance that other functional areas may also not support the idea or they may not extend their positive support which may be expected from them.
This is a problem because the management may be nursing the idea that a costing system is expensive. The management here has to be satisfied with facts and figures that the expenses incurred on installation will be far less than the benefits which may accrue to the management. Efforts should be made to get the full support of the management. A sense of cost consciousness is to be created.
2. Resistance of the Accounting Staff. The Financial Accounting staff may resist because they may feel that with the installation of costing system they would lose their importance. Here, the accounting staff has to be impressed that the costing system shall be a supplement to them. Their job shall be diffused. Their efficiency will improve. New opportunities for them shall be created. And due to all these, they shall stand benefitted.
3. Non-cooperation. Others in the organization may pose a problem by creating hurdles or by adopting a non-cooperative attitude. If they really choose to go by their non-cooperative attitude, naturally costing system may not succeed. Their non-cooperation may be in the form of non-supply of adequate data etc.
This problem can be tackled by educating the staff Particularly the advantages of the system should be fully explained to them. The important role the system is going to play should be explained and doubts entertained should be cleared. It is important to gain the confidence of all in the organization before installing a costing system.
4. Shortage of trained staff. In this beginning naturally, this will be a real problem. The staff engaged to run the newly installed costing system should be adequately trained before assigning the job to them. This will ensure the efficient functioning of the system and will ensure the desired results.
5. Continuous check over the progress. The system should turn out successful and should fulfill its objectives is important. This has to be ensured by establishing such a system which may be capable of producing results by ensuring continuous check over the progress of the costing department.

Objections against the Installation of Costing System

One of the objections against the installation of a costing system in any organization is that it is unnecessary and it involves duplication of work. Of course, it is duplication. But in the present complex business world, the management should know not only the exact cost but also how it has been made up. Management is benefitted by an efficient and sound costing system.
The exact cost is known to the management. Its break-up into various elements of cost is also known to the management. It assists in determining the competitive selling price. It ensures effective control over materials, labour and overhead costs. Managerial decisions are made possible with the help of a sound costing system as it provides the required cost data.
The second objection is that it is expensive. It is said that the system is quite expensive and only a large organization can afford such an expensive system. Agreed it is expensive. Also agreed that small-sized ard also medium-sized organization, cannot easily afford. But considering the advantages and benefits which accrue to the enterprise is far greater than the expenses to be incurred.
Neither, therefore, the costing system is unnecessary nor expensive provided the system is installed after careful consideration of all the factors involved installing a costing system and weighing fully the pros and cons of the system so installed.

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