Every manufacturing organization needs a costing system to keep track of their costs and practice cost control. However, every organization adopts a costing system best suitable for its structure and functioning. In such a case, an ideal costing system is one that offers the maximum advantages to the organization. Let us take a look.
Characteristics of an Ideal Costing System
An ideal costing system is one that offers the organization the most advantages and benefits of cost accounting. This following are some of the main aspects that must be a part of the costing system for it be to consider an ideal costing system.
Browse more Topics under Fundamentals Of Cost Accounting
- Origin and Evolution of Cost Accounting
- Meaning of Cost, costing and cost accounting
- Importance of Cost Accounting
- Financial Account vs Cost Account
- Meaning of Management Accounting
- Scope and Functions of Cost Accounting
- Objectives of Cost Accounting
- Advantages of Cost Accounting
- Costing – an aid to management
- Classification of Cost
- Methods of Costing
- Techniques of Costing
- Cost Unit and Cost Centre
- Cost Control and Cost Reduction
- Elements of Cost
- The format of the Cost Sheet
Suitability
Firstly, the costing system must suit the organization. Some points to be taken into consideration are the size of the organization, the nature of the business, conditions of the economy etc. The ideal costing system must provide information that is necessary for decision making by the management.
Learn more about Cost, Costing, and Cost Accounting here in detail.
Simplicity
Another aspect of an ideal costing system is that it must be simple and uncomplicated. The people working in the organization are not all qualified or experienced cost accountants. Even a person of the organization must be able to understand and operate this citing system with ease.
And the information and data provided by this cost accounting system should also be presented simply and clearly. This information will then be easily deciphered and useful to the management for their purposes.
Flexibility
Another important requirement is that the costing system must be flexible. An organization functions in a very dynamic environment, so it has to change according to these variations.
This means the costing system should also be flexible to adjust to all these variations and changes.
So the system should be able to adapt and do so reasonably fast in this fast-paced business world. There should be scope for quick expansion and contraction.
Economical
The entire point of a costing system is to provide cost information to the management so they can practice cost control. If the cost system itself is too expensive it defeats the purpose. The benefit gained from the costing system must outweigh the cost to run and maintain the system.
Only then it is beneficial in the long run. The requirements of the management and the business must be taken into consideration. And according to the financial capability of the business, an economical costing system must be put in place.
Comparability
The ideal costing system provides the management of the organization with the facts and data in such a way, that it can be compared with the data from the previous year and also with the data of other organizations of the same industry. This comparison helps the management evaluate the performance of the organization, hence it is an important aspect.
Timely
The costing system should provide management with accurate information when desired by them. So the data must be provided quickly and in a timely manner for it to be most effective.
Minimum Effort
An ideal costing system can be set up with minimum effort and changes to the existing set up of the organization. If the set up is extensive it will be a waste of time and money.
So the set up of the costing system must not intrude with the daily functions of the organization. The setting up of the organization should be seamless.
Solved Question for You
Q: An ideal costing system must involve ____ clerical work
- minimum
- maximum
- same
- none
Ans: The correct option is A. The clerical efforts and work involved with the costing system should be kept to a minimum. The filing up of forms and entries by foremen, workers, supervisors should be as limited as possible. There is scope for error in such clerical work.
