7 Main Steps for Installation of a Costing System

This article throws light upon the seven main steps for installations of a costing system. The steps are: 1. Objectives to be Achieved 2. Study the Product 3. Study the Organisation 4. Deciding the Structure of Cost Accounts 5. Selecting the Cost Rates 6. Introduction of the System 7. A Follow-up.

Installation of a Costing System: Step # 1.

Objectives to be Achieved:

The objective to be achieved should be very clear so that a thrust is given to that aspect. If the main objective is to expand production then the costing system should give more attention to production aspect, if the emphasis is to improve marketing of products then that area should be cared well.

Installation of a Costing System: Step # 2.

Study the Product:

The study of the product is very essential. The nature of the product determines the type of costing system to be used. A product requiring high costs on materials will need a costing system giving main emphasis on pricing, storing, issuing and controlling of material cost.

On the other hand, if the product requires high labour cost then efficient system of time-recording and wage payment will be essential and the same will be true of overhead cost too.

Installation of a Costing System: Step # 3.

Study the Organisation:

An effort should be there to introduce the costing system in the existing organisational set up. As for as possible, the organisation should be least disturbed.

It becomes, therefore, necessary to see the nature of the business and of the operations, the extent of authority and responsibility, the methods of dealing with wastages of materials, the system of wage’ payment, the sources from which the cost accountant has to derive information etc.

Installation of a Costing System: Step # 4.

Deciding the Structure of Cost Accounts:

A decision about the structure of cost accounts is the next step in the process of installing a costing system. The details of a suitable costing system should be worked out. The type of manufacturing process will determine the structure of cost accounts.

The sequence of production line should be followed by the costing system. The system should be so designed that there is a gradual build-up of the cost at each significant stage of production.

Installation of a Costing System: Step # 5.

Selecting the Cost Rates:

A decision is required for the allocation of various expenses among different products. What expenses are direct and what expenses are indirect? From indirect expenses an allocation is made among factory, office and selling and distribution overheads. This division of expenses will help in determining the cost rates.

Installation of a Costing System: Step # 6.

Introduction of the System:

The success of the costing system will depend upon its proper implementation. Its implementation will be possible with the full co-operation of employees in the organisation. There is a general human tendency to oppose new things. This can be tackled by properly explaining the system to the employees and the benefits accruing from its implementation in the future.

If required, the system should be gradually introduced instead of implementing it in full. At one stage the system may cover labour costs, at another time it may include materials cost and so on. As far as possible the existing routine should not be disturbed. The whole-hearted support of all employees will be helpful in making the costing system a success.

Installation of a Costing System: Step # 7.

A Follow-up:

A follow-up of the system is essential to make it practicable and useful. When a system is put into actual practice then its weaknesses and deficiencies may be realised. While collecting cost information from various sources there may be some difficulties in compilation of information, the data may not be sufficient; there may be delays in supplying information.

Once a problem is faced then efforts should be made to rectify it. The system should be readjusted to make it more useful and efficient.

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