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Friday, May 09, 2014

Steps in Installation of a Costing System

The costing system of an organization should be carefully planned in order to achieve its objectives. The important steps for the installation of a costing system are discussed below:
1)      Determination of objectives: The first step is to clearly lay down the objectives of the costing system. If the objective is only to ascertain the cost, a simple system will be sufficient. However, if the objective is to get information for decision making, planning and control, a more elaborate system of costing is necessary.
2)      Study of the nature of business: The nature of the business and other technical aspects like nature of the products, methods and stages of production cycle should be carefully analyzed. Such an analysis is necessary to decide the method of costing to be adopted. For example, contract costing is suitable for large construction projects. Operating costing is adopted by service industries like transport.
3)      Study of the nature of the organization: The costing system should be designed to meet the requirements of the organization. Hence, it is necessary to study the nature, size and layout of the organization. The factors to be considered are:

a.       Size of the organization and the size of the departments.
b.      The physical layout of the organization.
c.       The different levels of management.
d.      The extent of decentralization of authority.
e.      The nature of authority relationships.
4)      Deciding the structure of cost accounts: A suitable costing system can be developed on the basis of the study of the nature of business and organization. The structure of cost accounts should be simple and in accordance with the natural production process.
5)      Determination of cost rates: This step involves a thorough study of the following points for developing an integrated costing system.
a.       Classification of costs into direct and indirect costs.
b.      Grouping of indirect costs (overheads) into production, administration, selling and distribution etc.
c.       Methods of pricing issues.
d.      Treatment of wastes of all types.
e.      Absorption of overheads.
f.        Calculation of overhead rates.
6)      Organization of the cost office: The cost office is responsible for the efficient operation of the costing system. The cost office, with adequate staff must be located a close as possible to the factory. The following are the major functions of the cots office.
a.       Stores accounts.
b.      Labour accounting
c.       Recording of cost data and
d.      Cost control.
7)      Further, the role and duties and responsibilities of the cost accountant must be clearly defined. He must have the necessary authority to discharge his duties effectively.
8)      Introducing the system: After completion of the above steps, the costing system may be formally introduced. Introduction of the system in an existing organization should be done gradually. Before introduction, the feature of the systems, its working and advantages must be explained to the concerned employees to secure their co-operation.