Question

Describe into detail how to set up and design a cost and management accounting systems bearing in mind costing methods and techniques in cost ascertainment for a business. Which will ultimately help the business entity in costing and pricing of its products/services.

Select a business of your choice

Answer 1

Answer.

When a Cost Accounting system is to be installed, the following points should be kept in mind:

1. Objects:

What are the objects which the management wants to achieve and what sort of information does it need for the achievement of its objectives? Information about costs meant for fixing prices would be quite different from that intended to reveal efficiencies or inefficiencies in operations or that required to make decisions on a rational basis.

2. The Technical Details:

Technical operations of the concern and whether production is more important than selling or vice versa should be kept in mind. Obviously more attention must be paid to the more significant factor.

3. The Product:

The nature of product should be considered to decide type of cost system. For example, if materials used are insignificant, an elaborate system of materials control will not be necessary.

4. Factors:

Factors that are or are not amenable to control should be considered. Attention has to be paid to controllable factors. For instance, if a particular method of packing is prescribed by law, it is no use trying to think of an alternative.

5. Type of Materials:

The type of materials available and the timing of their supplies together with the storage problem, should also be taken into consideration.

6. Type of Labour:

The type of labour which is required and the methods of their remuneration should also be kept in mind.

7. Management:

The character of management itself and the decision-making process should also be taken into account. Modern managements usually need detailed information. The information flows will have to be designed with reference to the sources and end uses of the information. For example, if decisions are taken by a person who refuses to divulge any information, the system must keep this in view.

8. Business Peculiarities:

Any peculiarities of the business, that there may be, must be kept in view. For instance, if purchases of particular item are to be made only from one particular source or firm, the costing system need not build an adequate purchase procedure; it should concentrate on the proper use of the concerned item.

9. Use of Financial Books:

The possibility of using financial books and procedures should also be kept in mind. As stated above, cost accounting is to be treated as an investment and, therefore, all existing useful procedures, books and records should be used. For example financial accounts need adequate record of purchases and wages. With a little change, these can be made to serve the needs of Cost Accounting also. As far as possible, cost records and financial books should be well coordinated, even fully integrated.

THE STRUCTURE OF A COST ACCOUNTING SYSTEM

This system is composed by three main parts:

Chart of account(piano dei conti) : it is related to the acquisition of a resource.
Responsibility center : costs are classified on the basis of the destination; this means that each center contains costs related to activities done in that center;
The cost of each responsibility center is divided among the different products made in that center in a reference period of time t (allocation system).

COST ALLOCATION METHODOLOGIES

These techniques allow to quantify the amount of resources used during the production process and so the cost of the output. There are different methods :

Process costing
Operation costing
Job order costing
Activity based costing (ABC)