What are the factors which are taken into consideration before installing a costing system?

The Factors Taken Into Consideration Before Installing A Costing System?

The following factors are to be considered before installation of cost accounting system:

  • Objective of the costing system: A cost accounting before should be identified which will achieve the objective of the organisation.
  • Nature of the business: The nature of the business and operations or processes should be thoroughly studied in order to select proper method of costing. The nature of the product and type of production will determine the type of costing to be adopted.
  • Determining the cost rate: It covers decisions to be made about classification of cost in to direct and indirect, grouping of indirect cost in to production overhead, office and administration overhead, selling and distribution overhead, treatment of wastage, method of pricing issue, calculation of factory overhead recovery rate etc.
  • Proper communication system: Communication system ensures continuous flow of cost information to the appropriate authority. The system of cost accounting should be such that it will helpful to the management for getting reliable information as and when it is required.