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.
Also Read: Important Questions for Upcoming Exams
Unit – 1: Basic Concept of Cost Accounting (Part A) and Cost Sheet (Part B)
(These Questions are subject to modification, if necesary. Download DTS Application for complete notes)
Q. What are the advantages and limitations of cost accounting? 2019
Q. “Cost accounting is an essential tool to the Management” –Comment. 2011, 2012
Q. Distinguish and also mention the relationship between
Ø Cost accounting and Financial accounting 2013SN,2016SN, 2018SN
Ø Cost accounting and Management Accounting
Q. Explain the role and functions of cost accountant.
Q. Explain the purposes of classification of costs. Distinguish between direct cost and indirect cost. 2022, 2023
Q. Write Short notes on:
Ø Cost sheet or Statement of Cost 2017SN
Ø 4 Methods of Cost accounting
Ø 4 Techniques of Cost accounting 2019SN
Ø Characteristics of an Ideal Costing System
Or
Unit 1: Part B (Practical)
Practical Problems:
a) Cost sheet focusing on valuation of stock of finished goods, keep in mind expenses ignored in cost accounts, preparation of cost sheet from financial records (refer unit 4 – Reconciliation), profit percentages given on cost price or sale price. Every year
b) Follow 28 solved questions uploaded on my blog
c) Follow examples of BASU AND DAS COST ACCOUNTING BOOK.
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