As a consultant hired by a manufacturing company, HOW would you go about assessing the critical factors for designing and implementing a cost…

(a) Before installation of a system of cost accounting in a manufacturing organisation the under mentioned factors should be studied: (a) Objective: The objective of costing system, for example whether it is being introduced for fixing prices or for insisting a system of cost control. (b) Nature of Business or Industry: The Industry in which business is operating. Every business industry has its own peculiar feature and costing objectives. According to its cost information requirement cost accounting methods are followed. For example Indian Oil Corporation Ltd. has to maintain process wise cost accounts to find out cost incurred on a particular process say in crude refinement process etc. (c) Organisational Hierarchy: Costing system should fulfill the requirement of different level of management. Top management is concerned with the corporate strategy, strategic level management is concerned with marketing strategy, product diversification, product pricing etc. Operational level management needs the information on standard quantity to be consumed, report on idle time etc. (d) Knowing the product: Nature of product determines the type of costing system to be implemented. The product which has by-products requires costing system which account for by-products as well. In case of perishable or short self- life, marginal costing method is required to know the contribution and minimum price at which it can be sold. (e) Knowing the production process: A good costing system can never be established without the complete knowledge of the production process. Cost apportionment can be done on the most appropriate and scientific basis if a cost accountant can identify degree of effort or resources consumed in a particular process. This also includes some basic technical know-how and process peculiarity. (f) Information synchronisation: Establishment of a department or a system requires substantial amount of organisational resources. While drafting a costing system, information needs of various other departments should be taken into account. For example in a typical business organisation accounts department needs to submit monthly stock statement to its lender bank, quantity wise stock details at the time filing returns to tax authorities etc. (g) Method of maintenance of cost records: The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and in which results of separate sets of accounts, cost and financial, could be reconciled by means of control accounts. (h) Statutory compliances and audit: Records are to be maintained to comply with statutory requirements, standards to be followed (Cost Accounting Standards and Accounting Standards). (i) Information Attributes: Information generated from the Costing system should be possess all the attributes of an information i.e. complete, accurate, timeliness, confidentiality etc. This also meets the requirements of management information system.