Essential Features Of A Good Costing System

Higher efficiency can be obtained by using colour of the paper to distinguish different forms. Printed forms should contain instructions as to their use and disposal. Forms should be suitably designed for collection and dissemination of cost data. The benefits to be derived from the system must be more than its costs as management will be willing to install the system when it’s perceived expected benefits exceed its perceived expected costs. In short, the system must be economical taking into consideration the requirements of the business. The cost of installing and operating the system should justify the results. An ideal system of costing is that which achieves the objectives of a costing system and brings all advantages of costing to the business.

Essential Features Of A Good Costing System

Operational control is also easier in functional organizations where each unit performs narrowly defined functions. Furthermore, an operational control system can be installed inexpensively when production data are readily available. The annual product cost computation does not have to be part of the main financial accounting system, nor does it require a lot of time and money to develop and implement.

Direct Costs

When choosing an integrated accounting system, companies should define a clear idea of what objectives it needs to accomplish. In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance. The concept of equivalent production is also considered under process costing. It means that when some units are in semi-finished stage, these are to be expressed in terms of equivalent completed units or effective units. A good cost accounting system highlights the reasons for increasing or decreasing profit. If so, the management can take remedial action to maintain profitability of the concern.

In addition to the raw materials, additional materials or chemicals may be added in each process. Vi) Total cost of the finished product in the last process is cumulative i.e., it comprises of costs of all processes. I) Each plant is divided into a number of process cost centres or departments and each such division is a stage of production or a process. The output of a process may be transferred to the next process at market price to ascertain whether the product is profitable or not. A reserve for profit has to be created to find out the correct profit and to make valuation correctly of the closing stock. The whole factory is divided into various processes and in order to obtain the finished product. The inputs are passed from one departments to other departments.

Essential Features Of A Good Costing System

It enables to distinguish profitable and non-profitable activities. The costing information will help in making reliable estimates and will also help in submission of tenders. The cost ascertainment, allocation, distribution can be efficiently made under efficient costing system. Cost Accounting data generally serves as a base to which the tools and techniques of Management Accounting can be applied to make it more purposeful and management oriented. Wherever possible, concepts like Management by exception, Responsibility accounting etc. should be adopted into the Costing System. The Costing System must take care of the importance of comparability of data, with previous period’s data, with competitors’ data, with industry averages.

Elements Of Cost Accounting

Administration can ascertain their profit by analyzing the cost of an organization manufacturer process, which is only determined by cost accounting. Cost Accounting is used to determine the cost per unit of different products of a business concern which is helpful for the management of any company. Cost accounting helps in checking the accuracy of financial accounts with the help of reconciliation of the profit as per financial accounts with the profit as per cost account. To operate the business at high efficiency, it is essential for management to have a review of the production, sales, and operating results.

Job order costing focuses on task-specific production costs, while process costing tracks the cumulative costs of separate production functions. Standard costing predicts expected cost of production under normal circumstances. An effective cost accounting system enables you to maximize controls over the utilization of the scarce resources allocated to different production functions. Cost Accounting Systems are useful for all kinds of business, be it manufacturing or trading products, or even a company dealing in services. There are several types of cost accounting systems available for all kinds of businesses. Additionally, to ensure the effectiveness of the system, it is crucial that management understands the cost of production and calculate it correctly.

Standardization of records and accounting procedures and control systems. The system should be simple to understand and easy to operate. The users of costing data should be convinced of the Costing System from which the data is derived.

Integrated accounting systems furnish information regarding the cost of each product, job or operation as well as comprehensive information about the profit or loss of an entire organization. These systems help management achieve and maintain control over operations by enabling companies to determine marginal costs, variances and abnormal losses or gains.

For example, the mortgage or lease on a building is a fixed cost each month, whereas the utility bill is variable, and fluctuates, based on consumption and pricing from the provider. Of course, this can change, if you have negotiated a set rate with the utility company. The daily time frame is intensive, but using a weekly or monthly approach enables management to make productivity decisions, without waiting for the quarter to end. This nimble approach to accounting creates a window of opportunity to implement efficiencies, against cost issues, which would not otherwise be revealed, until the quarter or annual reporting periods. There may be shortage of cost accountants to handle the work of cost analysis, cost control and cost reduction. The work of costing department cannot be handled without the availability of trained staff. In most of the cases, the cost accounting system is introduced without the support of the top management in all the functional areas.

Faqs On Advantages And Disadvantages Of Cost Accounting

The costing information will find a way out in periods of trade depression and competition. Cost Accounting System is not only applicable to manufacturing organizations or functions but also extended to service organizations and functions. It locates differences between actual results and expected results.

By comparing operating costs against budget and to the same periods in the previous year, the system provided an excellent tool for cost control and productivity improvement. One chemical company’s system did a good job of estimating full product costs but could not be used for cost control. It gathered product costs at each production stage and cumulatively absorbed all variances along the production trail. While the system reported actual costs for all products, it provided no information to motivate or evaluate the cost-reduction efforts of production managers.

Preparation of special statistical and other information for management for carrying out special investigation and preparation of periodical trading statements. Evaluation of time sheets, job cards etc., preparing labour abstracts. The size of staff would depend on the volume of work involved. A costing organisation is not worth its existence if it cannot present figures with speed and accuracy and observe simplicity in the presentation of results.

Cost Accounting Has Become An Essential Tool Of Management

Accounting software provides detailed information of accounts, sales, and cash received. It is able to record advance payment and postdated cheques. Explain the five characteristics that are common to all effective accounting systems.

The output or finished product of one process becomes the raw material or Input for the next process until the final product is produced. Responsibility centers is fixed under cost accounting system. If responsibility is fixed, it becomes difficult to evade responsibility of performance and leads to effective performance.

Financial Management

Each process is deemed as a cost centre and costs are accumulated for each process separately along with output, finished and in progress. The finished product of one process becomes the raw material for the next process. Has nicely remarked, “The fundamental principle involved in process cost accounts is simple. A separate account is opened for each process or distinct operation to which all expenditure incurred thereon is charged. The processing of raw material may lead to joint products and by-products. The finished product of each process is treated as the raw material of the subsequent process. The production is continuous and the final product or end product is the result of a sequence of processes or operations.

Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the cost of a product by adding one additional unit Essential Features Of A Good Costing System into production. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit.

Helps To Prepare Financial Accounts

Job order costing helps you calculate the entire cost of the job in a step by step. This method enables you to find out errors, decide if the job is profitable, finding areas for process improvement, monitoring fixed asset usage and creating more accurate quotes for future jobs. It is a highly efficient costing method for a manufacturer who produces a multitude of products different from one another. Once the direct and indirect costs are calculated, they’re added together and submitted to the client to give a quote for the job.

Not only can you understand the total costs involved to produce your products, but it can be easier to spot instances of overcharging by vendors. Additionally, your company may be able to find efficiencies that allow you to save money. A cost of production report is used to collect, summarize and compute total and unit costs. Costing data helps management to decide whether in-house production of any product will be profitable, or it is feasible to purchase the product from outside. In turn, it is helpful for management to avoid any heavy loss due to wrong decision. In tough marketing conditions or in slump period, the costing helps to determine selling price of the product at the optimum level, neither too high nor too low. Cost accounting helps us to determine the periodical profit and loss of a product.

Cost Accounting Systems deal with cost control and reduction. The Financial Accounting System focuses on actual and projected results, or the profit and loss statement items. Therefore, only large organizations can afford to deploy the activity-based approach to value inventory. It allows management to check the raw materials in each stage of production. It primarily refers to the method by which costs are collected and identified with particular jobs, orders, customers, departments, batches, and processes. There are four ways to accumulate cost – Job Order, Process, Backflush, and Hybrid.

These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs. She is an expert in personal finance and taxes, and earned her Master of Science in Accounting at University of Central Florida.

The first step is to identify the job and its requirements.This is done by analyzing the factors and outcomes which will be affected by taking up this job. This is a very essential step because it helps you decide on an estimate for the job that you will be undertaking. Direct expenses are the costs that can be traced back to the spending of a specific department. These include expenses like design costs, tool maintenance and purchasing equipment that is directly used to manufacture the product.

Characteristics Of An Ideal Costing System:

Financial character expenses are not included for cost calculation. Items have been added to or deleted from the bill of material since the last cost update. Not all standards are available before your initial cost rollup. Cost of goods sold is an important part of accounting that… Driving lean changes from a deep understanding of the value created for the customers. Radical simplification and elimination of transactional control systems by eliminating the need for them. Throughput accounting aims to make the best use of scarce resources in a JIT environment.

Job order costing is a costing method which is used to determine the cost of manufacturing each product. This costing method is usually adopted when the manufacturer produces a variety of products which are different from one another and needs to calculate the cost for doing an individual job. Job costing includes the direct labor, direct materials, and manufacturing overhead for that particular job. Fixed costs don’t change based on a company’s level of production. These costs include items like rent, mortgage payments and salaries for administrative personnel. Fixed costs are significant, because they don’t stop if managers temporarily halt production.

What system of cost accounting is suitable and the extent of details required can be decided after a thorough study of the manufacturing process and their ancillary services. The structure of cost accounts should follow the natural production line; the sequence can be simple, analytical or synthetic.

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