A Study on Formulation of Costing System

mba finance projectsModern business needs frequent cost information about business activities to plan accurately for the future, to control business results and to make a proper appraisal of the performance of persons working in the organization. The fulfillment of these goals requires details about the costs incurred and benefits (revenues) obtained which are provided by “cost accounting”.
Financial accounting is developed over the time to record, summarize and present the financial transactions or events, which can be expressed in terms of money. This function was primarily concerned with record-keeping leading to preparation of Profit and Loss Account and Balance Sheet. The information obtained through financial accounts is useful to the shareholders, creditors, financial analysts, labour union, government authorities etc. However, the information generated by financial accountancy for several purposes is not sufficient for decision making in many areas, such as:

1. Acquisition of plant and machinery or other assets;
2. Determining product selection-addition or dropping or changing product combination in case of multi product company;
3. Determining output level;
4. Determining or revising prices of products;
5. Whether profit earned is optimum as compared with competitors as well as earlier years.

The need of data for such details led to the development of cost accountancy. The Institute of Cost and Management Accountants, London, has defined cost accountancy as the “application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of managerial decision-making”. Thus, it includes costing, cost accounting, budgetary control, cost control and cost audit.

The Institute of Cost and Management Accountants, London, has defined costing as the ascertainment of costs. Costing includes the “techniques” and “processes” of ascertaining costs. The ‘techniques’ refers to the principles and rules which are applied for ascertaining costs of products manufactured and services rendered. The ‘process’ includes the day to day routine of determining costs within the method of costing adopted by the business enterprise.

The law does not compel to install a costing system. However, the Government has the power to order installation of such system in such industries as the Government may deem fit. The system of costing is installed by the organizations on the grounds of its utility. A system of costing has to be designed to suit the needs of the organization. A good system of costing helps to achieve the objectives. It has the following essentials:
1. Flexibility- The system should have flexibility or adaptability to meet the changing needs of the organization. Expansion or contraction should be adopted with minimum change.
2. Integrated- It should be a well-knit integrated with financial accounting system. The original records are available under financial accounts. The need for co-relation between two cannot be over-emphasized.
3. Promptness- Any information or report is useful only if the same is furnished regularly and without any delay. The Cost Accounting System should ensure this aspect.
4. Accuracy- The system should ensure accurate information. To ensure this, the system should provide checks to verify data compiled in a systematic manner.
5. Smooth flow of data- Coat Accounting needs flow of data from every section in the organization and also reports on the performance of individuals. The objective of this system should be properly explained.
6. Continuous review- The system should be constantly reviewed and supervised, so that it gives what is expected of it. If it is not done, the system may become static.
7. Economy- The system should be economical and should not create financial burden on the organization.
8. Comparability- The system should enable the management to compare the data with the past. It should also facilitate departmental comparison.
9. Reconciliation- The system should facilitate reconciliation between cost accountancy and financial accounting easily.
10. Simplicity- The system should be as simple as possible.
11. Standardization- Forms and procedures under this system should be standardized.
12. Management support- The management at all levels should support the system and in its operations.

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