Costing system is a scheme easing monitoring costs to the company or organization. It consists of entry forms, processes, hands and accounts which correlate and report management about incomes, charges and profitability. All the fields including clients, processes, departments, services, sales areas, researches and development, etc. are included in reporting.
As most of the companies are profit-oriented, controlling expenses is the main part of profitability. Cost estimate and calculation are the base of business plans and evaluating whether incomes will cover charges. All the expenses and costs must be recorded and kept for analysis for further research and planning.
Reports aggregating details of expenses are used for internal purposes. All the data collected and transferred is used mainly for:
- improving operations in order to increase profits,
- finding areas where the costs could be cut in case of a financial difficulties of the company,
- comparing present charges to coffers envisioned,
- controlling expenses of individual areas of the whole business,
- setting realistic strategic and tactical plans of spends.
As per the nature of the process, it does not need to follow general rules stated by law nor controlling organizations. Controlling subject is management of the company. Administration decides on importance and urgency of information received. The report should consist of :
- tally of budget and actual costs,
- yield of different sectors, for example: clients, shops, production lines and sales factor,
- layout of costs on monthly basis for consecutive months.
Additionally, to calculate and control costs level accountants collect detailed information regarding expenses and mandating them person. Two most common systems used are:
- Job costing system- it includes charges of raw materials, work and general costs that are correlated and converted into cost per person or a task. It works for one-of-a-kind projects such as unique products and services. It is advanced and specific, but also time-consuming method.
- Process costing system- charges of raw materials, work and general costs are correlated and converted into a cost per the whole production process. Then the expenses are assigned to relevant production factors. This system works for mass production and can be robotized.
In some matters industry applies hybrid cost system, so qualities of both methods are combined and used.
Another well known system is ABC costing method. It has been compiled as per inaccurate assigning costs to factors, products and services and basing mainly on general costs without accurate division but averaging the expenses. This is more complex system of costing and may be hard to use as per whole business
Examples of Costing system
- Job Order Costing System: This is a system of assigning costs to individual products or services. It is typically used in manufacturing, where costs are assigned to each unit of production based on the materials and labor used to produce it.
- Activity-Based Costing (ABC): This system assigns costs to activities or processes within a company, such as marketing, manufacturing, or research and development. It is used to help companies identify areas of inefficiency and to allocate resources more effectively.
- Process Costing System: This system is used in the manufacturing industry to assign costs to products based on the number of processes used to produce them. It is used to track the costs associated with each stage of production and to identify areas where costs can be reduced.
- Target Costing System: This system is used to set a predetermined cost target for a product or service. It involves estimating the cost of a product at the beginning of the development process and then taking steps to reduce costs through design, manufacturing, and other processes.
Advantages of Costing system
A costing system can provide many advantages to a company or organization, including:
- Improved financial planning: A costing system allows for accurate budgeting and forecasting of future costs. This helps ensure resources are allocated in the most efficient and effective manner.
- Better cost control: A costing system can help identify areas for improvement and cost savings. This can include identifying wasteful spending, or finding ways to use resources more efficiently.
- Improved decision making: A costing system provides reliable data for decision makers, allowing them to make informed decisions about resource allocation and production processes.
- Improved customer service: A costing system can help ensure the most cost-effective products and services are offered to customers. This can improve customer satisfaction and loyalty.
- Improved profitability: A costing system can help identify areas of high profitability, as well as areas of low profitability. This can help a business focus on areas of greater potential profitability.
Limitations of Costing system
The limitations of a costing system include:
- Inaccurate data collection – Costing systems rely on accurate data to be gathered and reported. If the data is inaccurate, the costing system will produce results that are incorrect, leading to incorrect decision-making.
- High implementation costs – The cost of implementing a costing system can be high and, if not done properly, can be difficult to recover.
- Difficulty in re-assigning costs – Costing systems are often difficult to adapt to changing business needs. This can lead to difficulty in re-assigning or shifting costs from one area to another.
- Issues with scalability – Costing systems can become difficult to scale as the business grows. As the business grows, the costing system may not be able to keep up with the new demands, leading to inaccuracies.
- Complexity of the system – Depending on the type of costing system and the complexity of the business, the system can be quite complex and difficult to understand. This can lead to difficulty in interpreting the results of the system, making it difficult to make decisions.
Costing systems are a great way to track expenses and ensure that companies and organizations are running efficiently. In addition to this, there are other approaches that can help businesses better manage their costs. These include:
- Activity-Based Costing: This approach identifies activities that are needed to produce products or services and assigns costs to each activity. This helps organizations understand the cost drivers of their products and services, allowing them to make more informed decisions about how to optimize their operations.
- Target Costing: This involves setting a target cost for a product or service before it is created, and then making design and production decisions to ensure that the target cost is met. This helps organizations create cost-effective products and services.
- Lean Costing: This involves identifying and eliminating wasteful activities in order to reduce costs and increase efficiency. This helps organizations streamline their operations and save money.
In conclusion, there are a variety of approaches that businesses can use to better manage their costs, including activity-based costing, target costing, and lean costing. By understanding and utilizing these approaches, organizations can become more cost-effective and efficient.
- Balakrishnan R. B., Hansen S., Labro E., 2011. p. 1-16.
- Zhang Y. F., Isa C. R., 2010, p. 1-4.
- Fisher J. G., Krumwiede K., 2012, p. 43-51
- Balakrishnan R. B., Hansen S., Labro E., (2011). Evaluating Heuristics Used When Designing Product Costing Systems, "Management Science", 1-16.
- Fisher J. G., Krumwiede K., (2012). Product costing systems: Finding the right approach, "Journal of Corporate Accounting & Finance", 43-51.
- Zhang Y. F., Isa C. R., (2010). Factors Influencing Activity-Based Costing Success: A Review, "International Conference on Business, Economics and Tourism Management", 1-4.
Author: Anna Zalewska