Steps for Installation of a Costing System

Introducing a costing system into an organisation that does not already have one is itself a planned exercise, not something done casually. The commonly recommended steps, or factors to be kept in mind, are:

1. Study the organisation thoroughly — its size, the nature of its product/service, its production process, layout, and existing organisational structure, before designing anything.
2. Define the objectives and scope clearly — decide exactly what the costing system is expected to achieve (cost ascertainment only, or also cost control, pricing support and decision-making) and how detailed it needs to be.
3. Choose a costing method suited to the nature of the business — for example, a method built around identifiable jobs/contracts for a business that makes to customer order, or a method built around continuous processes for a business with continuous, homogeneous output. (The specific costing methods themselves are studied in later units.)
4. Design suitable cost centres and cost units for the organisation, following the principles covered in the previous section, so that costs can be meaningfully collected and expressed.
5. Weigh accuracy against cost — decide the degree of detail and precision the system should aim for, keeping in mind that a more elaborate system costs more to run; the system should never cost more than the benefit it delivers.
6. Design simple, practical forms and records, and integrate them as far as possible with the existing financial accounting records, so that the same transaction is not recorded twice in two unrelated systems.
7. Secure the cooperation and understanding of the staff and management who will operate and use the system — a costing system imposed without buy-in tends to be resented and poorly maintained. …