Precautions for installing effective cost accounting system

A cost accounting system is used by manufacturers to record production activities using a perpetual inventory system. In other words, it’s an accounting system designed for manufacturers that tracks the flow of inventory continually through the various stages of production.

Precautions

The Technical Details

Technical operations of the concern and whether production is more important than selling or vice versa should be kept in mind. Obviously more attention must be paid to the more significant factor.

Objects:

What are the objects which the management wants to achieve and what sort of information does it need for the achievement of its objectives? Information about costs meant for fixing prices would be quite different from that intended to reveal efficiencies or inefficiencies in operations or that required to make decisions on a rational basis.

The Product

The nature of product should be considered to decide type of cost system. For example, if materials used are insignificant, an elaborate system of materials control will not be necessary.

Type of Materials

The type of materials available and the timing of their supplies together with the storage problem, should also be taken into consideration.

Factors

Factors that are or are not amenable to control should be considered. Attention has to be paid to controllable factors. For instance, if a particular method of packing is prescribed by law, it is no use trying to think of an alternative.

Type of Labour

The type of labour which is required and the methods of their remuneration should also be kept in mind.

Management

The character of management itself and the decision-making process should also be taken into account. Modern managements usually need detailed information. The information flows will have to be designed with reference to the sources and end uses of the information. For example, if decisions are taken by a person who refuses to divulge any information, the system must keep this in view.

Business Peculiarities

Any peculiarities of the business, that there may be, must be kept in view. For instance, if purchases of particular item are to be made only from one particular source or firm, the costing system need not build an adequate purchase procedure; it should concentrate on the proper use of the concerned item.

Use of Financial Books

The possibility of using financial books and procedures should also be kept in mind. As stated above, cost accounting is to be treated as an investment and, therefore, all existing useful procedures, books and records should be used. For example financial accounts need adequate record of purchases and wages. With a little change, these can be made to serve the needs of Cost Accounting also. As far as possible, cost records and financial books should be well coordinated, even fully integrated.

Choice of Unit

The choice of the unit regarding which costs have to be obtained should also be considered. For example, in case of steel, costs are ascertained per tonne of steel and in case of cotton textiles, the unit is kg. of yarn or cloth. In case of motor transport the cost will be found per bus-kilometre or passenger-kilometre or sometimes tonne-mile. These are known as units of cost and it is necessary to choose a proper unit neither too big nor too small.

Full Discussion

Above all, the system should be designed after a full and frank discussion with all those who will be involved.