Installation of a Costing System

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 27, 2023

A costing system should collect statistical data for significant operations, analyze the data, and make it available to the management to support managerial decision-making.

Hence, the costing system should benefit the undertaking. Accordingly, the following matters and conditions require consideration when introducing a costing system:

1. Costing System Objectives

Firstly, organizations should determine the objectives and expectations of installing the costing system. The costing system may be introduced to fix prices or institute a system of cost control.

2. Consideration of Significant Variables

Organizations should ascertain the significant manufacturing unit variables likely to control and affect the business unit. In some manufacturing units, material cost represents the dominant factor.

In such cases, the costing system should pay greater attention to controlling the material cost, which is achievable through efficient supervision of purchasing, receiving, storing, issuing, pricing, and utilizing the materials.

If labor cost is the dominant factor, the undertaking should devise an elaborate system to control the recruitment, preparation of labor records, and payment of wages.

3. Suitability to Product

The proposed costing system must correspond to the nature of the product or the manufacturing process involved.

4. Suitability to the General Organization

The costing system should suit the general organization of the undertaking. Thus, introducing the system should not unduly alter or extend the present operations.

5. Consideration of the Technical Details of the Business

Here, organizations should consider the technical aspects of the business and attempt to win the sympathetic assistance or support of the principal supervisory staff members.

6. Use of Standard Forms

Printed forms should record the cost data, reduce clerical work, and minimize the possibility of errors.

7. Details of Cost Records

Details of cost records should be minimum according to the requirements of the management.

8. Prompt Availability of Costing Information

Organizations should promptly and regularly make costing results available to the management because such records aid the decision-making process.

9. Degree of Accuracy Desired

Organizations should clarify the desired degree of cost data accuracy and how they can verify such accuracy.

10. Reconciliation of Results

Both cost accounts and financial accounts should be interlinked into a single accounting system, or they should be capable of reconciliation.

Primary Objectives of Installing a Costing System

No single system applies to every organization because all endeavors have distinct requirements. The objectives of installing a costing system include:

  • Profitability
  • Ease of use
  • The installation cost must not exceed the expected benefit
  • The system should serve the nature of the business
  • The system should serve the quality of the management and the quality desired by the management
  • The system should make full use of the available data and provide all required information
  • The system should ensure the prompt and regular preparation and presentation of cost data
  • The system should maintain the degree of accuracy desired by the management

Problems and Possible Solutions

1. Lack of support. The management may not support installing a costing system because, for example, they may consider it expensive.

In such cases, other functional areas may not support the idea or extend their positive support.

Thus, the facts and figures related to the installation should satisfy the management and convince them that the system’s benefits will outweigh its costs.

Ideally, a sense of cost-consciousness should be created.

2. Resistance of the Accounting Staff. The financial accounting staff may resist over fears the installation of a costing system would reduce their importance.

These employees may require placation and should be informed of the benefits provided by the system: improved efficiency, new opportunities, more varied jobs, and so forth.

3. Non-cooperation. Others in the organization may cause problems by adopting a non-cooperative attitude, such as failing to supply adequate data.

This behavior may harm the implementation of the costing system.

The answer lies in educating the staff, informing them of the advantages of the system, and easing any doubts they may have.

Gaining employees’ confidence represents a crucial aspect of installing a costing system.

4. Shortage of trained staff. Initially, a lack of trained staff will cause a problem. However, a sensible approach and providing training to use the system will ensure its efficient use and generate the desired results.

5. Continuously checking progress. Establishing a system capable of producing results by continuously checking the progress of the costing department will help meet its objectives.

Objections Against the Installation of a Costing System

A costing system can create objections over its perceived lack of necessity and duplication of work.

However, in the present complex business world, an efficient costing system benefits the management by clarifying exact costs and their constituent parts.

Knowing exact costs helps determine the competitive selling price and ensures effective control over materials, labor, and overhead costs.

A sound costing system should provide the required cost data.

Objections can also arise over perceived costs and that only large organizations can afford such an expensive system.

However, the advantages and benefits for all enterprises, regardless of size, are often far greater than the incurred expenses.

Thus, the costing system is rarely unnecessary or expensive, provided that the enterprise carefully considers all the pros and cons associated with its installation.

Installation of a Costing System FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.