Basic Steps involving to install the Costing system

Introduction:  Costing system is an important tool for Cost control and cost optimization in any type of organization. Each industry has got different type of cost involving in to the operations, whether it is manufacturing or service or any other type of industries need to have proper costing system to understand and know about the cost of  their product or service. Understanding this cost will give lot of advantages like fixing product price, fixing margin, fixing profitable product mix and various management decisions. In this article I would like to discuss some basic tips useful to install the costing system in any type of organization and industry.

1. Understanding of the process flow: In any type of organisation whether it is manufacturing or service, understanding of product or service process flow will be important to install the costing system, this process involves study the entire flow of the product or process from input stage to output stage of the product or service. This starts from the order receiving from the customer and how the same will be processed inside the organisation, what and all activities involved in the process and how it will be delivered to the customer. Understanding of process flow first steps to install the costing system in any organisation

2. Understanding of the Costing methods:  As I mentioned in the introduction each industry has got different costing methods involving in the operations. Costing methods are process costing, job costing, batch costing, service costing, contract costing etc. Manufacturing industries mostly apply process costing, job & batch costing system. Service costing and contract costing will apply for the service industries. So to study and understand the applicable method of costing is the next step to install the costing system.

3. Identifying the cost of an each activity: Based on the study of process flow as mentioned in the point No.1, we need to examine and identify the cost of on each activity, this method also called Activity Based Costing system (ABC).  Each and every activity need to be linked with the output product and service and also need to be examined the value addition of that activity to the end product and process. It will help to install the costing system effectively towards help to control the cost.

4. Understanding of the Prime cost structure: In any costing system we can have the prime cost which directly related to the activity of the operations. Prime cost which includes the Material, labour and other direct expenses which related to the manufacturing or operations. This is very basic understanding to install any costing system.

5. Understanding the nature of cost & Over head cost behavior: After Identified the cost of activities and prime cost structure, we need to examine and understand the nature of cost like fixed cost, variable cost, semi fixed or semi variable. Each cost has different nature with its related activity, nature purely based on the activity related. Based on this cost can be categorized as variable, fixed or semi fixed or semi variable. So carefully examine the activities and decide the nature of cost. This is very important step for further all the costing & management related analysis about the cost & profitability of the product or service.

6. Setting of proper allocation and apportionment methods: All the costs may not be possible to identify the specific activity. Some of the cost we unable to identify to the specific sector, like shared services department cost we unable to identify the specific activity, so while setting costing system we need to decide the correct cost allocation and apportionment method in the organistion.

7. Creating cost awareness: Costing is not only the function of cost department, costing is the collective function of all the departments. Also costing system not only for identify the cost of the product or process it also covers the cost control and cost optimization, so only costing team will not do this job, all the department should involve this process, example the cost of designing of the product should aware the designing team then only the cost control or optimization can be done, so installation of costing system should create the cost awareness to all in the organisation.

Conclusion: These above points are not exhaustive, these are basic steps for installation of costing system other than this the steps and requirements will vary for different industries and organizations.

Thank you

CMA.Ramesh Krishnan

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CMA Ramesh Krishnan 
on 19 December 2011
Published in Accounts
Views : 22264

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