What are the Problems of installing costing system in a business?

Answer 1

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