Installation of a Costing System

A costing system is not bought off a shelf and switched on — it must be designed to fit the particular business, then introduced with care. Installation of a costing system means the process of designing and setting up a suitable cost accounting system for a specific organisation.

Factors to consider before installing a costing system

• The nature of the business and its product — the kind of product and the way it is produced decide which method of costing (job, process, unit, etc.) is appropriate.
• The objective and information needs of management — the system must be built around the specific information management actually wants, not around what is theoretically possible.
• The organisation structure — the system's cost centres and reporting lines must fit the firm's departments and lines of authority.
• The technical details of production — the sequence of operations, the flow of materials and the layout of the factory must be understood so that costs can be collected at the right points.
• Cost versus benefit — the system should be only as elaborate as the business genuinely needs; the benefit it gives must justify its cost.
• Simplicity and flexibility — it should be simple enough for the staff to operate and understand, and flexible enough to be changed as the business grows or its needs change.
• Reconciliation with financial accounts — the system should be designed so that its results can be reconciled with the financial accounts.

Difficulties commonly faced in installation

• Resistance from staff — employees, especially existing accounting staff, may resist the extra work and the scrutiny a costing system brings; this is often the single biggest practical obstacle.
• Shortage of trained staff to run the system.
• Heavy cost of installation and running, which management may be reluctant to bear.
• Lack of support from top management, without which the system will not be taken seriously by the rest of the organisation. …