What are the requisites of an effective system of costing?

Following are the essentials of a good cost accounting system:

Simple to Operate: The cost accounting system should be simple to understand and operate so that persons involved may not be confused and follow wrong procedures or methods.

Flexibility: The cost accounting system should be flexible to adopt new requirements based on changes occurring in the enterprise due to external conditions.

Comparability: The costing system should be able to provide comparable data. Comparison can be between the figures of two or more periods of the same firm or between the figures of the firm and those of the competitors for a particular period or periods.

Economy: The cost accounting system should justify the cost of operation through resultant benefits. The system should be operated with least cost.

Timeliness: The system must be capable of providing appropriate information in Time for decisions relating to cost control. 

Suitability to the Enterprise: The cost accounting system devised should be suitable to the nature of business done by the enterprise and it should fulfil the requirements of the business.

Minimum Changes in Current Setup: The existing system of Authority and responsibility, delegation etc., should not be disturbed. Changes in the organisational setup should be minimum possible.

Minimum Clerical Work: The clerical work like filling up forms by workers and foremen should be minimum possible so that their basic work rhythm is not disturbed.

Simplicity of Forms and their Standardisation: The forms used as part of the costing system should be minimum in number, standardized in format and simple to operate by the personnel so that required information is obtained in time.

Effective System to Control Materials and Wages: The system relating to purchase, receiving, inspection, storage and issue of materials should be effective. The method of pricing material issues should be appropriate to the situation in the firm. the procedures for Time recording. Time booking, overtime, payroll preparation, etc. should be systematic and effective. 

Procedure for Overheads: The routine prescribed for overheads should lead to proper allocation, apportionment and absorption of overheads.

Reconciliation: Reconciliation of cost accounting with financial accounting is to be facilitated to reveal the reasons for difference in profits.

External Factors: The costing system should ensure compliance of statutory and legal requirements like cost audit, cost accounting rules etc.

Cost Accountant’s Role: The responsibilities, and duties of the cost accountant should be clearly defined. He should have access to all the departments and divisions of the firm.

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