ESSENTIALS OF A GOOD COSTING SYSTEM
A costing system is a set of procedures and techniques used by businesses to determine the cost of producing a product or providing a service. Costing systems are designed to capture all the costs associated with the production process, including direct materials, direct labor, and overhead costs, such as rent, utilities, and depreciation.
Costing systems can be divided into two broad categories: job costing and process costing.
Job costing is used for businesses that produce custom or unique products or services, while process costing is used for businesses that produce standardized products or services on a large scale.
Job costing involves tracking the costs associated with each individual job or project, including the cost of materials, labor, and overhead. The total cost of the job is then divided by the number of units produced to determine the cost per unit.
Process costing, on the other hand, involves tracking the costs associated with a particular production process or department. The total cost of the process or department is then divided by the number of units produced during the period to determine the cost per unit.
Costing systems provide businesses with valuable information on the cost of their products or services, which can be used to set prices, make informed business decisions, and monitor performance. They are an essential tool for businesses to ensure they are producing goods and services at a cost that allows them to remain competitive and profitable.
ESSENTIALS OF A GOOD COSTING SYSTEM
A good costing system is essential for businesses to accurately determine the costs of their products or services. Below are the essentials of a good costing system:
Simplicity: Costing system should be simple to operate and easy to understand. The facts, figures and other information’s revealed by cost accounts should be so presented as to make them easily graspable. As such the needless elaboration of costing accounts should be avoided.
Accuracy: A good costing system should provide accurate and reliable cost data, as inaccurate data can lead to incorrect decision-making and ultimately impact the profitability of the business.
Relevance: The costing system should be relevant to the business and the products or services it produces. It should be tailored to the specific needs of the business and reflect the costs associated with the production process. A costing system should be so devised as to suit the conditions, requirements, nature, and size of the business. A costing system which serves the purposes of the business and supplies necessary information for running the business successfully is an ideal system for that business.
Timeliness: An ideal system of costing is one in which information necessary for its functioning are promptly, easily, and punctually available. Promptness can be ensured if arrangements are made for the prompt supply of records by the various departments relating to materials, labour, overhead etc., to the costing office and the data obtained are promptly analysed and recorded. Costing information should be available in a timely manner to support decision-making. Delayed or outdated information may not be useful for decision-making purposes.
Cost-benefit analysis: The costing system should take into consideration the costs associated with implementing and maintaining the system, and the benefits it provides to the business. The costs of the system should not outweigh the benefits it provides.
Flexibility: The costing system should be flexible and adaptable to changes in the business environment, such as changes in production processes, product lines, or technology. It should, in particular, be suitable to handle a large volume of the work as also to deal with the changes in the nature of the business.
Comparability: The costing records must be presented in scientifically classified form so that a comparative study of costing results of different periods can be made.
Transparency: The costing system should be transparent and easy to understand. It should provide clear and concise information that can be easily interpreted by managers and stakeholders.
Integration: The costing system should be integrated with other management systems, such as financial accounting and budgeting systems, to provide a comprehensive view of the business.
Reconciliation of results: The costing system should be so maintained as to make reconciliation of cost accounts with financial accounts easy and simple. This reconciliation is very essential for checking the accuracy of cost accounts as also for measuring the efficiency of costing system.
In summary, a good costing system should be accurate, relevant, timely, cost-effective, flexible, transparent, and integrated with other management systems.