Cost Codification: Objectives and Methods | Cost Accounting

In this article we will discuss about:- 1. Objectives of Cost Codification 2. Requirements of Efficient Coding System 3. Methods.

CIMA defines a coding “a system of symbols designed to be applied to a classified set of items, to give a brief accurate reference facilitating entry, collation and analysis”.

Codification of costs is a system of assigning code numbers to each head, subhead and category of expense to facilitate the systematic and easy recording, accounting, summarization of cost data for ascertainment of cost, profitability and managerial decision making.

The importance of coding is vital with the mechanized and computerised systems of costing. A good coding system should consist of clear, unambiguous and distinctive codes in order to systematize the analysis of costs for accurate cost ascertainment expeditiously and with least cost.

Objectives of Cost Codification:

The important objectives of codification are given below:

(a) For apportionment of similar items of expenses on one suitable basis of apportionment.

(b) It systematizes the recording and accounting of cost data and control of expenses.

(c) The computerised Cost Accounting is made easier with codification of accounts.

(d) It will reduce the clerical work in the organization with huge number of accounts.

(e) It facilitates automatic allocation, apportionment and absorption of costs to different cost units or cost centres.

Requirements of Efficient Coding System:

The requirements for an efficient coding system are as follows:

(a) The codes should be as brief as possible, taking into account the necessity of details of item.

(b) As far as possible, all codes should be of same length. This helps in computerization of costs and location of errors.

(c) The code should comprehensive and elastic and should be capable of accommodating new items.

(d) To minimize errors, the code should incorporate check digits so that computerised system can detect coding errors.

(e) There is centralized authority in maintenance of coding system. Every individual should not be allowed to allocate code numbers.

(f) The code should be unique and certain. Each item should have only one possible code number and should be able to be identified from the structure of code.

Methods of Codification of Costs:

The following methods are used in codification of costs:

1. Straight Numbering Method:

Under this system each item of expenditure is allotted a fixed number. This method is also called ‘numerical coding system’.

For example: Factory rent – 21

Office rent – 22

Sales office rent – 23 etc.

2. Number Blocks:

Under this method each head of expenditure is given one block of numbers. The block of numbers allotted will depend on the subheads to be accommodated. This method is a slight variation of straight numbering system.

Depreciation – 1 to 100

Insurance – 101 to 200

Repairs and maintenance – 201 to 300

3. Memoric Method:

Under this method, alphabets are used as codes to help the memory.

For example:

Depreciation – Office Buildings – DOB

Depreciation – Factory Buildings – DFB

Depreciation – Godown – DGD

4. Decimal Method:

Under this method, numerical codes are allotted to various expenses and cost centres classifying into major, minor and detail account heads:

A. Production Overhead

a. Indirect Materials:

i. Consumable store

ii. Cotton waste

iii. Lubricants

iv. Loose tools

b. Indirect Labour

i. Time office

ii. Security

iii. Clerical staff

c. Indirect Expenses:

i. Factory rent

ii. Depreciation of Plant and machinery

iii. Insurance of Factory building

B. Administration Overhead:

a. Indirect materials

2.1.1 ………………….

b. Indirect labour

2.2.1 ………………….

2.3 Indirect expenses

2.3.1 …………………. etc.

5. Field Method with Numerical Codes:

Under this system, each code number consist of nine digits. The first two digits represent the variable or fixed nature of expense; the next three digits indicate head of expense, the next two digits stand for the analysis of expense and the last two digits indicate the cost centre, where expenses have been incurred.

For example Code 10/100/03/05/ represents for:

Fixed/Production Labour/Monthly Salary/Machine Shop

6. Combination of Symbol and Numbers:

Under this method, a combination of symbol, alphabet and a number is used to represent a code.

For example:

D1 – Depreciation Factory Building

D2 – Depreciation Administrative Building

D3 – Depreciation Plant and Machinery

D4 – Depreciation Vehicles, etc.

Here alphabet represents the main head of the expense and number represents the analysis of expense.