Installation Of Costing System

Having established the need for a cost department in an organization, let us find out the method of installation of a cost system. Obviously, it will depend on the objectives of costing, the nature of business and information flow system.  The system will be simple, if object is simple like only price fixing. It aims at controlling cost and measuring efficiency of operations, the requirements will be different. If it is installed as per legal requirement, then it must satisfy the legal needs. The nature of the business will again indicate the degree of complexity of the system. The information flow will depend on the levels of management, who will receive information and the periodicity of reporting required.  In most industries products, cost accounting record rules as prescribed by the Government are to be maintained. In such cases care must be taken so that prescribed proforma can be filled in from the cost records/books of accounts so maintained.

It is evident that installing a good cost system is quite a challenging task. The three fundamental requirements are as follows:–

• Organization chart – showing the lines of authority and delegation of responsibility.
• Departmentalization – dividing the organization into production and service cost centres, to which expenses are charged.
• Chart of accounts – showing control accounts for the elements of cost as well as expense items, so as to enable collection and classification of costs both expense wise and cost centre wise. The system requires total involvement by all the beneficiaries i.e. sales, production, engineering, purchase, personnel, quality control departments. The success of the system will finally depend on the top management which must extend full support to the system.  In actual handling of the installation work, the following technical aspects are to be carefully considered.
  • To study the existing organization chart and layout of the factory.
  • To follow the production process right from the production planning, purchase and storage of materials, issues of materials to production, production process from initial till primary and secondary packing and loading on transport for distribution.
  • To examine documents and reports prepared and issued by each department, including records maintained for returns furnished with the Government and outsiders.
  • To interact with various levels of management to find out their expectations of the system.

  Finally, the system has to be developed keeping the following factors in view:

  • The system should be simple and easy to operate. Complexity should be avoided.
  • The system should give accurate, timely and adequate information.
  • The system should be elastic and capable of adopting to changed situation.
  • The system should be cost-effective. It should yield a much higher return on capital invested in installing and running the department.