Read this Article upto the End to know about the Installation of Costing System, essentials of Good Costing System, Steps, Difficulties and How to Overcome those Difficulties.
When New Costing System is introduced in a firm for the Installation, it comes with a Complete set of Rules, steps or the procedure, benefits so as to achieve the Objectives at a faster pace with the Minimum Cost.
There is not any fix method for Costing System. There are so many Methods for Installation of a Costing System. Companies adopt those methods which fulfils their Requirements.
But Fulfilling the requirement is not enough, there are so many costing systems available in the market which can fulfil the needs of firm but it doesn’t give the company a Cost Benefit Analysis.
Cost Benefit Costing System means the Benefits of New Costing System should be more than its Expenses which makes a profit situation for the company.
It’s because the Reason for Installation of Cost Accounting System is to achieve the objectives and easy to adapt for all the employees.
Essentials of Good Costing System
- Able to Achieve- A Costing System Should be able to achieve practically by the firm. Only Planning is not required, If It can’t be implemented in company then it will go in vain.
- Should not be over elaborated- The Costing System should never be introduced in firm in such a way so that it will be over elaborated. It will result in a burden for all the Employees as well as the Top Executives.
- Provided in a Printed Form- Whenever the Installation of Costing System is introduced, it should be provided in a printed form. It’s because it includes so many instructions and policies which should be pre-written for the company.
- Reconciliation of Cost and Financial Accounting- The Costing should be presented in such a way so that the Results of both sets of Accounts- Cost Accounting and Financial Accounting should be reconciled.
- Should be less disturbed as possible- The Installation of a Costing system should be introduced in such a way so that it should be disturbed as little as possible for all the company.
- Must be Introduced Gradually- The Costing System must be introduced gradually so that all the Employees should be easy to switch to a new system.
- Should be Economical- The Installation of Costing System in Cost Accounting should be economical for the firm. The Installation and Operating Cost of the Costing System should not exceed to its value of the Management.
- Simplicity- The Costing System should be simple and well-designed so that it should be easy to implement by all the Employees and the other staff. The facts, instructions, policies should be introduced at the right time by the right person to make it more easier and simpler.
- No Changes with Existing Management- The New Costing System shouldn’t affect the Delegation and Responsibilities of the Management. Try to make possible very less changes by the New costing system in the management.
Steps for Installation of a Costing System
- Organizational Structure of the Company- Studying the Organizational Structure by Cost Accountant is firstly important which comprises of the Nature of Business, Delegation, responsibilities. All these encourage the expenses to the Cost Accounting Department.
- Manufacturing Procedure or other process- The Cost Accountant must know all about the Manufacturing and Cost Accounting Procedure like Incentive Schemes, cost of Machinery, Cost of Work Rates, Cost of Wages and lot more.
- Objectives to be Achieved- The Objectives firm want by the New Costing System should be determined first. If the Firm has objective to know the cost then the Costing System will be more simpler. If there is an Objective to know more, then the Costing System will be more detailed.
- Nature of Product- Cost Accountant should also know about the Nature of Product which includes what type of Raw Material firm use in which quantity and what consumption.
- Type of Cost Information- The Installation of New Costing System requires every type of Cost Information like the cost incurred at particular level or labour cost and lot more. Firm has to know all the cost Information to take remedial action for deviation.
- Organization of Cost Office- The Cost Office Department should be situated near to the Factory so that there should not be a delay in the improving the Discrepancies or solving the doubts.
- Provide Information speedily and accurately- In the Procedure for Installation of a Cost Accounting System, firm should provide information speedily to the Cost Accounting Department as well as accurately which is also required. It’s because just give information speedily is not enough if it is not authentic. So, it should also be accurate.
- The Costing Staff should have access to the production- This is the last but not the least step for the Installation of a Costing System which is Costing staff should have access to the Production Department. It’s because the Production constitutes a very important part in Introducing a New Costing system. By having access to the production by the Cost Accountant, they can easily know the Daily Production units, the per day Cost, direct, indirect expenses and lot more.
Duties of Cost Office
- Store Accounts- Store Accounts include all the Raw Material Receipts and all the details about Stores Ledger and more.
- Labour Accounting- It includes the Preparation of Payrolls, Paychecks and Check Labour Time while coming in the Office and leaving the Office. It also includes the leisure time spent between the Work and more.
- Cost Accounts- It includes the cost of all the relative activities of Cost Accounts whether job or process or Service Accounts.
- Cost Control Accounts- It includes the sum up information of all the first two points in the Duties section.
- Costing Department and its relationship with other Departments- The Cost Department can do the work independently in the other Departments. The Other Departments should maintain a Good Relationship with the Cost Department and vice-versa.
- Authority and Responsibility- The Installation of a New Costing System will be successful if the Authority and Responsibility is properly defined first between the Departments. In all together, Everything should be clear first.
Practical Difficulties in Installing a Costing System-
- Non-Cooperation at other levels of Operations- This is one of the main difficulties in Installation of Costing System. That is Cooperation with other level of Departments. So many Other Departments don’t cooperate with the New Costing System because of not switching from the Old System and so many other reasons also.
- Lack of Support of Top Management- So Many times the Top Management doesn’t give the support to the New Costing System because of over burden in elaboration, out of Budget and lot more other reasons.
- Lack of Interest in Cost Saving and Production- The Installation of Costing System has the primary aim to save or reduce the cost. But so Many Departments who do the screening of the Costing System are not interested in Cost Saving and Production. They don’t think about the Company Benefits which they should. This leads to the other Difficulty in Installation of Cost Accounting.
- Carelessness and Indifferent Attitudes- So many Departments have a Careless and indifferent attitudes towards the Completion of Costing System. They send the New Costing System Idea back to Cost Accounting Department by giving unspecified reasons.
- Lack of Trained Staff in Cost Department- A New Costing System comes with the New Methods or techniques for which the Employees in Cost Department has to get Training. Having the lack of Trained Staff also creates the difficulty.
- Heavy Cost- Sometimes, A New Costing System requires some New Softwares, Different Office or some Building Expenses which creates a Heavy Cost for the Company. This also creates the difficulty in New Costing System.
- Resisting from Existing Staff- So many times, the Existing Staff doesn’t want to switch from the Old Costing System to New System because of having all New Training and other procedures. Majority of Employees to this creates the resistance from the Existing Staff.
How to Overcome the Difficulties?
- Arrange the Meetings- Arrange meetings with all the supervisors and the Management Peoples to tell them how simply you can use this New Costing System for their Business. The Presentation of New Costing System should be simple, not over elaborated and well defined and understood.
- Attempts to Gain Confidence- Attempts should be made to gain the confidence and inform the new Changes in the Existing Practices to the Management.
- Give Training- Train the Staff of the Cost Department of the New Cost Methods and Techniques so that the Staff can get a better Understanding of the New Costing System.
- Impress the Top Management- Sometimes there is a Case mostly happens that All the Senior Staff and Management are agreed to the New Costing System but the Top Management rejects the decision. So, the foremost Important thing to impress first the Top Management. Tell why their Company has the need of New Costing System and must tell the Benefits of Cost Accounting Department.
- Proper Supervision- There should be proper supervision while adopting the Installation of New Costing System in the Cost Department so that whatever the objectives Cost Accountant has decided, the same should be achieved. If there are any deviations, try to remove them and able to achieve the goals of Cost Accountant.
- Installed according to the Specific Requirements- The New Costing System should be installed and operated according to the Specific Requirements of the Firm. All the Unnecessary Cost should be avoided and should include all the specific requirements.
Also Read- Cost Accounting Notes for BBA, B.COM AND MBA
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