INSTALLATION OF COST ACCOUNTS

At the outset it is to be understood that a common cost accounting system cannot be installed for all types of business undertakings. The cost accounting system depends upon the nature of business and the product manufactured. Before a suitable system of cost accounting is installed it is necessary to undertake a preliminary investigation so as to know the feasibility of installing cost accounting system to such business. While introducing a system of cost accounts it should be borne in mind that cost accounting system must suit the business. There should not be any attempt to make the business suit the system. One more consideration that is of practical importance is that the benefits derived from cost accounting system must be more than the investment made on it. This means the system must be simple and it must lead to savings through the control of materials, labour and overheads when compared to expenses incurred in maintaining it. For the successful functioning of the costing system, the following conditions are essential :

(a) There must be an efficient system of material control.

(b) A sound and well designed method of wage payment must be set up.

(c) The existence of sound basis for collection of all indirect expenses and a basis for its apportionment to various production departments.

(d) The integration of cost and financial accounts to facilitate reconciliation of profit as shown by these two systems of accounts.

(e) The use of printed forms so as to facilitate quick compilation of cost reports.

(f) The duties and responsibilities of cost accountant must be made clear.

Factors to be Considered before Installing a Cost Accounting System

The following factors are to be considered before installing a cost accounting system :

1. History of business unit : The history of a business unit implies the duration of its existence, position in the industry, the rate of growth, policy and philosophy of management and the like. The history of business unit serves as the basis for designing the cost accounts in respect of necessity, simplicity, and investment involved in installing cost accounts.

2. Nature of the industry :The nature of business such as manufacturing, mining, trading, etc. determines the costing techniques to be applied. Similarly, the type of product manufactured also determine the method of costing that is to be employed. In other words,there is no all purpose technique and method of costing that can be applied universally.

3. Product range :The range of products manufactured and sold also determine the method of costing to be selected. Accordingly range of products must be analysed in terms of size, models, fashions, area of market, competitors and whether the products are made to customers specification or for stocking and selling.

4. Technical considerations :Technical considerations that influence the installation of cost accounts are as follows :

(a) Size and layout of the factory

(b) The existence of production and service departments

(c) Flow of production

(d) Capacity of machines and degree of mechanisation

(e) Existence of laboratories

(f) Internal transport and material handling equipments

(g) Production control techniques

(h) Inspection and testing of materials and finished goods.

REQUISITES OR ESSENTIALS OF COST ACCOUNTING SYSTEM

The following are the essentials of an ideal cost accounting system :

1. Accuracy :
   The system of cost accounting must provide for accuracy in terms of both cost ascertainment and presentation. Otherwise it will prove to be misleading.

2. Simplicity :
   Cost accounting system involves detailed analysis of cost. To avoid complications in the procedure of cost ascertainment an elaborate system of costing should be avoided and every care must be taken to keep it as simple as possible.

3. Elasticity :
   The cost accounting system should be capable of adopting itself to the changing situations of business. It must be capable of expansion or contraction depending upon the needs of the business.

4. Economy :
   The costs of operating costing system must be less. It must result in increased benefit when compared to the expenditure incurred in installing it.

5. Comparability :
   The records to be maintained must facilitate comparison over a period of time. The past records must serve as a basis to guide the future.

6. Promptness :
   An ideal costing system is one which provides cost data in an analytical form to the management. So all the departments of a factory must analyse and record the relevant items of cost promptly in order to furnish cost information on a regular basis to various levels of management. This helps in checking up the progress of the business on a regular basis.

7. Periodical preparation of accounts :
   With a view to facilitate the comparison of results frequently, it is desirable to prepare accounts periodically. Constant comparison of actual result with standard result enables to spot out areas of inefficiency. This can be set right by taking remedial measures.

8. Reconciliation with financial accounts :
   The system of cost accounts must be capable of reconciling with financial accounts so as to check accuracy of both the system of accounts.

9. Uniformity :
   The various forms and documents used under costing system must be uniform in size and quality of paper. Printed forms must be used to avoid delay in the preparation of reports. This also reduces the burden of clerical staff. Forms of different colours can be used to distinguish different documents.

10. Equity :
    The basis of apportioning indirect expenses to products, departments or jobs must be fair and equitable.

STEPS IN INSTALLATION OF COST SYSTEM

1. setting up of objectives for each management activity
2. study of existing organizational routine
3. structure of cost accounting system
4. determination of cost rates
5. introduction of the cost system