Characteristics of an efficient Cost Accounting system

Characteristics of an efficient Cost Accounting system

Characteristics of an efficient Cost Accounting system

An efficient cost accounting systemshouldmeet all its objectives and achieve all the advantages of a good cost accounting system. It should possess the following characteristics and should be taken into consideration at the time of installation of a cost accounting system.

  1. Suitability to the business : Cost accounting system should be made to suit the specific needs of an  organisation, division department even a product line. The systemshould be designed according to the needs, requirements and size of the business. It should supply the necessary information for running the business efficiently.
  1. Simplicity : The system should not be complicated. It should be simple and capable of being understood by the costing staff without much difficulty.
  1. Flexibility : The cost accounting systemshould be designed in such a way that it may be flexible enough to be changed according to the fast changing conditions and circumstances of business and industry. Thus, the system must have the capacity of expansion or contraction without much difficulty.
  1. Cost Effective : The system should be economical both in installation and operation. The benefits to be derived fromthe systemmust bemore than the costs involved. It must be adapted according to the financial capacity of the business.
  1. Comparability : The costing system should provide all the necessay facts and figures to the management for evaluating the performance by making a comparision of these figures with the past figures of the same concern or those of other concern or against industry as a whole or other departments of the same concern.
  1. Timely presentation of information : The systemshould be capable of providing accurate and timely information so that the management can make decisions for effective cost control.
  1. Minimum changes in the existing organisation structure : The costing system must not disturb much the existing system of delegation and division of authority and responsibility. The system should be designed in such a way that it requires as minimum changes as possibles in the organisational set-up.
  1. Uniformity of forms : All the forms, proformas, procedures etc. used through out the organisation should be uniform in size and quality of paper. This avoids confusion and leads to quicker and better understanding of cost data by staff in different departments.
  1. Minimumcrericalwork : Sincemost of the workers are not well educated, forms and procedures should be designed in such a way that clerical work is reduced to the minimum.
  1. Effective control on materials : As materials usually account for a greater proposition of the total cost, there should be an efficient system of stores control.
  1. Adequate control on labour cost : There should be well defined procedures for recording of time, prearation of wage sheets and disbursement of wages. There should be strict control on idle time, holiday with pay and overtime.
  1. Departmentalisation of overheads : There should be an effective system of collection, allocation, apportionment and absorption of overheads so that ascertainment of accurate cost is possible.
  1. Reconciliation of cost and financial Accounts : Cost accounting should be designed in such a way that it is possible of integrate or reconcile both cost accounting and financial accounting systems. This can be done through control accounts.
  1. Defining duties and Responsibilites of Cost Accountant : Under a good system of cost accounting the rights, duties and responsibilites, of the cost accountant should be clearly defined. Because of this, he is able to know clearly whom he should approach, which information and which cost reports are to be made ready for whom by what time.
  1. Timely availability of cost reports : The system should be designed in such a manner that cost reports and other cost information are made available as and when required.

Steps for installation of cost accounting system :

While installing a cost accounting system in an organisation, the following steps should be taken:

i) Design to suit Specific Needs : The objective to be achieved through the costing system should be determined. If the objective is only to determine cost, the system will be simple and if the objective is to provide information to the management for decision making, the system will have to be elaborate.

ii) Deep study of production details : Before installing the system, the management should make an in – depth study of the nature of business, products and processes, technologies, plant layout, nature of materials used, labour force etc., so that the cost accounting system is tuned to the requirements of the business.

iii) Determining the structure of Cost Accounts : After a thorough study of the manufacturing process and the ancillary services, the system of cost accounting suitable should be determined. The structure of the system of cost accounts should follow the natural production line. The designing of the system should be such that there is a gradual build up of the cost at each significant stage of production as the product proceeds to completion.

iv) Cost – benefit study : Before installing cost accounting system, a cost benefit analysis should be done. The benefits from the system should far exceed the costs involved. Even the best system becomes useless, if cost exceeds benefit.

v) Detemination of overhead Rates : This involves classification of cost into direct and indirect and grouping of indirect costs into production, administration, selling and distribution overheads calculation of overhead rates and methods of recovery of overheads.

vi) Cooperation from the staff : The success of a cost accounting system depends on the cooperation obtained fromall the staff concerned. Hence, before installing the systemthe need, the benefits and intricacies of the system should be explained to all the staff concerned. This helps in removing apprehensions in the staff and getting cooperation from them.

vii) Support from management : cost accounting system will be effective and can achieve the desired results only whenmanagement at all levels, particularly topmanagement, extends whole hearted support both in installation of the system and in its operation.

viii) Minimum necessary changes in the existing set-up : Only necessay modifications should be made in the existing organisation strucure. This will help bring down cost of installation to the reasonable level. A wholesale change in the organisational structure will not only be very costly but also will disrupt the functioning.

ix) Not competitive system : Cost accounting function is supplementary / Complementary to the accounting function. It should not be made competitive. Collection and reporting of information available from accounting department should not be duplicated in cost accounting department.

x) Organising the cost office : It is advantageous to locate the cost office adjacent to the factory because the delay in routing out documents or in clearing up discrepancies and doubts is avoided. The costing staff should have access to works so that they can perform their duties properly. The size of staff should be decided on the basis of volume of work involved.

xi) Trained and qualified staff : Since cost accounting is a specialised activity, before installing the system, adequately qualified staff should be recruited and they should be provided with intensive training. It helps in running the system effectively.

xii) Codification : All costs of all products relating to all departments should preferably be coded. This will increase speed in handling and processing of costs. It also facilitates computerisation of costs.

xiii) Cost Audit : Records prepared by costing department should be subjected to regular cost audit. It ensures correct compilation and maintenance of cost accounts and strict adherence to the costing principles laid down.

xiv) Relationship of cost office to other departments : The costing department should function independently. The cost accountant should be responsible only to the top management-the managing director or the generalmanager. The costing system should be designed to serve the management at all levels. Therefore, the cost accountant should design his whole system of records and reports etc., with this purpose in view.

xv) External Environment : Basically cost accounting system is designed to serve the needs of the management within the organisation. However, these financial needs are influenced by various external factors like, legislative changes, governmental policies, price level changes, technological advancement etc. Hence, while installing the costing system and monitoring its operation, all these factors should be taken into consideration.