Page 18 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 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 and management related analysis about the cost and 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.

Difficulties at the time of installation of cost accounting system are mentioned as follows:
1. Resistance by existing accounting staff: Very often the existing accounting staff resists
the installation of the cost accounting system on two grounds. Firstly, they feel that the
new system of accounting might lead to excess work. Secondly, they are afraid of their job
security. But this difficulty may be overcome by encouraging them about the usefulness
of cost accounting as a supplement to financial accounts and the generation of more
employment opportunities from the installation of cost accounting system.
2. Non-cooperation from middle and bottom level management: At times the middle and
bottom level managers such as foremen, supervisors and inspectors also fail to extend their
wholehearted cooperation fearing additional work which may be entrusted to them this
problem may be overcome by suggesting them about the simplicity of the system and the
existence of a separate cost accounting department to look after costing matters. However,
they may be required to provide necessary reports concerning their area of activity so as to
enable functioning of cost accounting department efficiently.

3. Lack of support from management: Wherever costing system is installed, it is essential to
seek the support of various departmental managers. Very often the managers show hostile
attitude towards the costing system. They feel that this system will interfere in their routine
work and probably as a means of checking their efficiency. Under such circumstances it is
better to convince them about the utility of costing system for the business as a whole.

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