Thursday, April 18, 2024
HomeTechnologyThe Natural Outcome of Uniform Costing

The Natural Outcome of Uniform Costing

The method of uniform costing is a natural outcome of the organisation of a number of undertakings in the same industry or other industries which are closely related to each other through trade association or otherwise.

It enables the member units to compile the cost records and performances on a comparable basis which may be useful and helpful for their management.

It is a tool for managerial control

The success of uniform costing depends on complete co-operation among the member units. This co-operation is difficult to achieve as the business units belonging to one industry may be of different sizes, use different methods of production and costing techniques and produce different volumes of output.

Hence it is necessary to establish a uniform costing system so that the comparison of costs among all the concerns can be made to the common advantage of all the constituent units of the enterprise. In this connection the apportionment of overheads, collection and classification of costs and standard terminology are important factors.

This can be done by adopting a common method and technique of costing. The resulting data can be used to compile the accounts of the enterprise in a manner which will help management in making crucial decisions.

Uniform costing is a natural outcome of managerial control as it helps to maintain effective control over the operations of the concern through adequate cost accounting records and by the establishment of realistic pricing policies. This in turn ensures that the firm does not enter into unhealthy competition with other concerned entities in the same field.

It is a good tool for performance appraisal as it provides a basis for setting the objectives and targets in terms of costs, performance and profitability. It also enables the central organisation or trade association to fix uniform prices for products and services at which members will be able to make minimum margins of profit.

In small concerns the problems of costing are handled by one person and the authority is given to him to carry out the work efficiently but in big concerns there is need for division of work and responsibility and authority is required for each level of management to carry out their duties effectively.

The nature of business differs from one concern to another due to difference in manufacturing processes, different types of machines and plant and equipments, the degree of mechanization, differences in materials mix and sequence, and other factors. It is necessary to eliminate these differences in order to establish uniform costing procedures and principles.

It is a tool for performance appraisal

Uniform costing is a natural outcome of managerial control, performance appraisal and standardization of operation in an industry. This method avoids the cut-throat competition amongst the member-units of an industry and also enables them to produce or provide services at lower costs.

Management of an industry has to be able to compare the costs of its own unit with the costs of other undertakings in the same industry in order to find out the areas where cost savings can be made. This enables the management to know where they are spending more money and where they can save money and hence improve their overall efficiency.

However, uniform costing is not a magic pill and must be used with caution. If it is not properly implemented, it may lead to monopolistic conditions in an industry and exploitation of customers and workers.

The following are some of the benefits of using uniform costing:

  1. Managerial control – It is essential for managers to be able to monitor their own cost figures and compare them with those of other companies in the same industry. This is a useful tool for controlling the company’s expenses and ensuring that they are not overrunning budget limits.
  2. Performance appraisal – It is important for employees to be able to see how their work is being evaluated by others and whether their efforts are meeting expectations. This can be a helpful tool in managing employee behavior and encouraging them to work towards higher levels of performance.
  3. Performance evaluation – It is an effective way to measure individual and group performance. It can also help to identify strengths and weaknesses in a workplace and assist in developing employee development plans.
  4. Healthful competition – It is essential for healthy competition to be maintained between the members of an industry. This can be achieved by establishing mutual trust, cooperation and confidence between the units of an industry.
  5. Economic benefit – It is beneficial to use uniform costing in an industry because it allows all the members to compare their costs and profits with those of other firms. This allows the members to identify areas of weakness and economy that can be effected through improvement in production methods or in the provision of efficient services.

It is a tool for standardization of operation

Uniform costing is a natural outcome of the fact that several undertakings in an industry follow the same costing principles and practices for ascertaining cost. It is not a system of Cost Accounting like Job costing, Process costing, Output costing and Operating costing but is a method of estimating the cost of production through a common procedure of recording and compiling the cost data.

It is a tool for standardization of operation and performance evaluation. It provides a yardstick for evaluating the efficiency of various units in the same industry by comparing their cost and profitability.

The cost and accounting data compiled under this system is used by the management for taking crucial decisions. It also helps in eliminating or minimizing unhealthy competition among the member-units.

However, the success of uniform costing is totally dependent on the co-operation between the member-units and their mutual confidence. This co-operation is possible only when all the units in the same organization/trade association are under the same management.

In the case of industries where the business units are different in terms of size, methods of production and volume of output such a decision is not an easy one. It requires complete co-operation of all the units for a long time and it may not be feasible in such a situation.

Besides, the costing system of the large size units can be distorted due to vast disparity in their production process and mechanization. This can make it difficult to find out the proper uniform costing principles, methods and techniques.

The success of uniform costing depends on the commonness of the method of determining costs and recording them. There should be a uniform cost manual prepared by the trade association/organization and all the members must agree to the same.

A uniform costing system is beneficial in an organisation having many branches and the same operations and procedures. It is especially useful in a firm having a number of plants under the same ownership and control.

It is a tool for healthy competition

Uniform costing is a natural outcome of a number of factors which are associated with the adoption of uniform standards and methods of costing. These include differences in size and organisation set up, wage structure, method of production and degree of automation and application of different methods and principles of cost accounting.

Uniformity in costing principles and methods is necessary for effective comparison of the results of different firms in an industry or a group of firms. Such comparison is essential to make a clear distinction between the activities of a company and those of the competition in order to establish a fair selling price for its products and to ensure that the producers are able to earn a profit without putting any undue pressure on consumers.

The comparison also allows the members of the firm to learn about their weaknesses and ineconomies in the production process which they can try to improve or economise on. This knowledge can be utilised in the management of the firm to help it take better control of the operations.

Another important advantage of a uniform costing system is that it helps to eliminate unhealthy competition between the member units and prevents them from fixing their prices too low. This can cause the creation of monopoly in the industry and the exploitation of workers and consumers.

This can be avoided by ensuring that the member units give accurate and complete information about their costs periodically in an agreed format. In this way, the central organization or the trade association is able to fix a Standard Selling Price for the product or service.

If this is not done, the resulting prices for the products will be low and will be unprofitable to the firms manufacturing them. In such circumstances, the Government may be compelled to provide subsidies and grants for the industries so as to enable them to survive.

The use of uniform costing is not an easy task because it requires complete confidence on the part of all member units in giving true and accurate data to the central organisation or the trade association. If the members of the firm are not able to give full information, the utility and success of uniform costing will be seriously affected.



Please enter your comment!
Please enter your name here

Most Popular

Recent Comments