9 essential factors for installing cost accounting system

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As in the case of every other form of activity, it should be considered whether it would be profitable to have a cost accounting system. The benefits from such a system must exceed the amount to be spent on it. This would depend upon many factors including the nature of the business and the quality of the management. Management, which is prone to making decisions on the basis of pre-conceived notions without taking into account the information and data placed before it, cannot derive much benefit from a costing system. On the other hand management, which is in the habit of studying information thoroughly before making decisions, would require cost accounting system. Before setting up a system of cost accounting the under mentioned factors should be studied:

(i) The objective of costing system, for example whether it is being introduced for fixing prices or for insisting a system of cost control.

(ii) The areas of operation of business wherein the managements’ action will be most beneficial, For instance, in a concern, which is anxious to expand its operations, increase
in production would require maximum attention. On the other hand for a concern, which is not able, to sell the whole of its production the selling effort would require greater
attention, The system of costing in each case should be designed to highlight, in signifi­cant areas, factors considered important for improving the efficiency of operations in that area.

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(iii) The general organization of the business, with a view of finding out the manner In which the system of cost control could be introduced without altering or extending the organization appreciably.

(iv) The technical aspects of the concern and the attitude and behavior that will be successful in winning sympathetic assistance or support of the supervisory stiff and workmen.

(v) The manner in which different variable expenses would be affected with expansion or cessation of different operations.

(vi) The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and in which results of separate sets of accounts, cost and financial, could be reconciled by means of control accounts.

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(vii) The maximum amount of information that would be sufficient and how the same should be secured without too much clerical labour, especially the possibility of collection of data on a separate printed form designed for each process; also the possibility of instruction as regards filling up of the forms in writing to ensure that these would be faithfully carried out.

(viii) How the accuracy of the data collected can be verified? Who should be made responsible for making such verification in regard to each operation and the form of certificate that he should give to indicate the verification that he has carried out ?

(ix) The manner in which the benefits of introducing Cost Accounting could be explained to various persons in the concern, specially those in charge of production department and awareness created for the necessity of promptitude, frequency and regularity in collection of costing data.

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