Installation of Costing System
The installation of a costing system requires careful consideration of the following two interrelated aspects:
· Overcoming the practical difficulties while introducing a system
· Main considerations that should govern the installation of such a system
Practical Difficulties
The important difficulties in the installation of a costing system and the suggestions to overcome them are as follows:
a. Lack of Support from Top Management
Often,
the costing system is introduced at the behest of the managing director
or some other director without taking into confidence other members of
the top management team. This results in opposition from various
managers as they consider it interference as well as an uncalled check
of their activities. They, therefore, resist the additional work
involved in the cost accounting system.
This
difficulty can be overcome by taking the top management into confidence
before installing the system. A sense of cost consciousness has to be
instilled in their minds.
b. Resistance from the Staff
The
existing financial accounting staff may offer resistance to the system
because of a feeling of their being declared redundant under the new
system.
This
fear can be overcome by explaining the staff that the costing system
would not replace but strengthen the existing system. It will open new
areas for development which will prove beneficial to them.
c. Non-Cooperation at Other Levels
The
foreman and other supervisory staff may resent the additional paper
work and may not cooperate in providing the basic data which is
essential for the success of the system.
This
needs re-orientation and education of employees. They have to be told
of the advantages that will accrue to them and to the organization as a
whole on account of efficient working of the system.
d. Shortage of Trained Staff
Costing
is a specialized job in itself. In the beginning, a qualified staff may
not be available. However, this difficulty can be overcome by giving
the existing staff requisite training and recruiting additional staff if
required.
e. Heavy Costs
The
costing system will involve heavy costs unless it has been suitably
designed to meet specific requirements. Unnecessary sophistication and
formalities should be avoided. The costing office should serve as a
useful service department.
Main Considerations
In
view of the above difficulties and suggestions, following should be the
main considerations while introducing a costing system in a
manufacturing organization:
1. Product
The
nature of a product determines to a great extent the type of costing
system to be adopted. A product requiring high value of material content
requires an elaborate system
of
materials control. Similarly, a product requiring high value of labor
content requires an efficient time keeping and wage systems. The same is
true in case of overheads.
2. Organization
The
existing organization structure should be distributed as little as
possible. It becomes, therefore, necessary to ascertain the size and
type of organization before introducing the costing system. The scope of
authority of each executive, the sources from which a cost accountant
has to derive information and reports to be submitted at various
managerial levels should be carefully gone through.
3. Objective
The
objectives and information which management wants to achieve and
acquire should also be taken care of. For example, if a concern wants to
expand its operations, the system of costing should be designed in a
way so as to give maximum attention to production aspect. On the other
hand, if a concern were not in a position to sell its products, the
selling aspect would require greater attention.
4. Technical Details
The
system should be introduced after a detailed study of the technical
aspects of the business. Efforts should be made to secure the
sympathetic assistance and support of the principal members of the
supervisory staff and workmen.
5. Informative and Simple
The system should be informative and simple. In this connection, the following points may be noted:
(i)
It should be capable of furnishing the fullest information required
regularly and systematically, so that continuous study or check-up of
the progress of business is possible.
(ii)
Standard printed forms can be used so as to make the information
detailed, clear and intelligible. Over-elaboration which will only
complicate matte$ should be avoided.
(iii)
Full information about departmental outputs, processes and operations
should be clearly presented and every item of expenditure should be
properly classified.
(iv)
Data, complete and reliable in all respects should be provided in a
lucid form so that the measurement of the variations between actual and
standard costs is possible.
6. Method of Maintenance of Cost Records
A
choice has to be made between integral and non-integral accounting
systems. In case of integral accounting system, no separate sets of
books are maintained for costing transactions but they are interlocked
with financial transactions into one set of books.
In
case of non-integral system, separate books are maintained for cost and
financial transactions. At the end of the accounting period, the
results shown by two sets of books are reconciled. In case of a big
business, it will be appropriate to maintain a separate set of books for
cost transactions.
7. Elasticity
The costing system should be elastic and capable of adapting to the changing requirements of a business.
It
may, therefore, be concluded from the above discussion that costing
system introduced in any business will not be a success in case of the
following circumstances:
1. If it is unduly complicated and expensive
2. If a cost accountant does not get the cooperation of his/her staff
3. If cost statements cannot be reconciled with financial statements
4. If the results actually achieved are not compared with the expected ones
