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Uniform costing is a system of cost accounting to be used by the members of the industry or Trade Association. It involves adoption of same costing principles, practices and procedures by the individual members of industry for inter-frm comparison. In india, it is being used in coal industry, steel industry and fertiliser industry.
Uniform costing is a system of cost accounting to be used by the members of the industry or Trade Association. It involves adoption of same costing principles, practices and procedures by the individual members of industry for inter-frm comparison. In india, it is being used in coal industry, steel industry and fertiliser industry.
Uniform costing is a system of cost accounting to be used by the members of the industry or Trade Association. It involves adoption of same costing principles, practices and procedures by the individual members of industry for inter-frm comparison. In india, it is being used in coal industry, steel industry and fertiliser industry.
Uniform costing is not a separate or distinct method
of cost accounting like job costing or process costing.
It is only a system of cost accounting to be used by the members of the industry or trade association. It involves adoption of same costing principles, practices and procedures by the individual members of the industry for inter-frm comparison.The system is made operative through Trade Association or hamber of ommerce or some other central agency. Its underlying idea is that !hatever costing methods are used, the same should be applied uniformly by all the members of the industry. "efore a uniform costing system is applied, it is utmost necessary to educate the members about the desirability of this system and its underlying principles. Uniform costing is not a ne! concept. It !as frst introduced by the #ational Association of $tove %anufacturers of U.$.A. !hich developed a uniform formula for use by its members for costing industry&s products. $imilarly, a uniform costing system !as adopted for printing industry in the United $tates. "ut in U.'., "ritish (ederation of %aster )rinters !as the frst organisation to introduce a uniform costing system. In India, it is being used in coal industry, steel industry and fertiliser industry. There is a good scope of using uniform costing system in other industries too. I%A defnes uniform accounting as *a system, using common concepts, principles and standard accounting practice, adopted by di+erent entities in the same industry to facilitate inter-frm comparison., 1
Application of Uniform Costing System:- $ingle ompany having a number of factories located at di+erent places producing similar products or performing similar operations. (or e-ample, this system is being used by Associated ement ompany for its plants. In this case, management prescribes a set of forms and procedures for the plant and all the records are maintained in a uniform manner. A number of companies !ithin the same industry. #ormally Trade Associations or hambers of ommerce coordinates the function of uniform costing system. %embers of the association are re.uired to maintain uniform costing records !hich are helpful in measuring the operating e/ciency of its members. It ensures that cost data submitted by member companies are comparable and consistent. Introduction of Uniform osting helps the companies to submit reliable cost data to price f-ing bodies, like "ureau of Industrial costs and )rices or other 0ovt. departments to determine the average cost and f-ing the fair selling prices of various products. 2 Objectives of Uniform Costing:- To have a reliable cost data for inter-unit or inter-frm comparison of costs. To compare the operational e/ciency of individual members against industry&s overall performance of all member units. To f- a common selling price for the industry as a !hole on the basis of cost of production of all member units. To reveal lines of individual products !hich have been marketed on an unproftable basis. To reveal lines of individual products !hich have been marketed on an improftable basis. 3 %ember-companies adopt one best method of cost accounting system kno!n to the industry. This eliminates unsound method and saves costs re.uired in perfecting systems through e-pensive e-perimentation. #e! companies can adopt it as a ready-made system. 1ther companies can adopt the common system for improving their e-isting system. It develops a sense of a!areness for production e/ciencies !ithin the industry for controlling costs. It provides standard guidelines for pricing of products and indicates ho! prices f-ed belo! la certain level may be self-defeating even though it may bring additional sales. It is benefcial to all the competing companies for flling tenders and .uotations and conse.uently ill-e+ects of competition are avoided. In case of 2cost-plus& contracts, uniform costing facilitates preparation of cost sheets on commonly accepted standard principles and practices. Thus, it helps early fnali3ation of 2cost plus& claims. 4 It helps the hambers of ommerce and Industry to present their case to 0overnment on matters such as tari+s or e-port incentives. It encourages research and development !ork at comparatively lo! cost to the member- companies. The benefts of research and development carried out by large scale organi3ed units can be shared by the small units. It enables the member-companies to receive the services of cost e-perts jointly !ith the minimum e-penditure. It facilities the introduction of uniform !age structure for the industry as a !hole. It serves as a pre-re.uisite to cost audit and inter-frm comparison. 5
The various member-units in an industry di+er !idely !ith regard to location, age, condition of plant and degree of mechani3ation. This di+erence is sometimes so !ide that it does not permit e/cient use of uniform costing system. (or smaller units, this system may not commensurate !ith the benefts derived. Uniform costing system may not commensurate !ith the benefts derived. The standard terminology used in the uniform costing system may not be understood properly by the member companies. 4o!ever, this objective can be overcome by introduction of Uniform osting. 6 For successful application of uniform costing system, the following conitions must be satis!e: The members of the trade association or hamber of ommerce should !ork !ith a spirit of mutual trust and cooperation. %embers should e-change their ideas freely, !ithout fearing the leakage of secrecy. The !ell-organised and large-scale sector should be prepared to pass on the technological improvements in the process5method of production to the other companies !ho unable to conduct their o!n research and development activities. The companies must furnish full and correct information to the Association so the e/ciency of the members-companies can be compared. The members should not !ork !ith a sense of rivalry and jealousy. 7 "he term #Uniform Cost $lan% covers activities such as cost accounting system, format for reports, analysis of cost ata, etc& Some of the activities which may be carrie on partially or completely are as follows: )ublication of pages, speeches or discussions of important matters pertaining to costs in Trade 6ournals. )ublication of educational literature pertaining to objectives of cost fnding. $tudies of particular costing problems in the industry to develop sound principles. Activities of counseling nature rela-ing to establishment or operatives of cost accounting system. 7evelopment of estimating formulae or short-cut methods of establishing basis for pricing. 7evelopment and promotion of uniform cost programme. ost studies in determining average or representative cost of products, functions or activities for general information of members. 8egular collections and dissemination of cost data under some kind of reporting plan. omplete analysis of cost data to interpret results to sho! trends, !eakness of operation, etc. 8
9hether cost data are re.uired for one product or al the products produced in a factory. osting techni.ues to be used, i.e, historical, standard or marginal. 7efnitions of various elements of cost such as: direct material direct labour cost of direct services factory overheads, administrative and selling overheads. Items !hich are e-traneous to costs such as bad debts, donations, etc, and to be e-cluded from cost. lassifcation of production and service departments. %ethod of treatment of spoilage, defectives, etc, in costs. Treatment of research and development in costs and methods of allocation of research 9 and development to each cost centre5cost unit. Treatment of handling and storage cost of ra! materials. %ethod of pricing of materials used such as (I(1, ;I(1, simple average, !eighted average. )roduction centres, cost centres, etc, to be used for analysis and comparison of costs. %ethods of payment of remuneration. Treatment of items like interest on o!n capital, rent of premises o!ned, etc %ethod of !orking out depreciation, i.e, !hether straight line method or !ritten do!n value method to be used. %ethod of apportionment of service departments costs to production departments. $ystem of classifcation and codifcation of cost accounts. %ethod of valuation of !ork in progress. The method of presentation of data and reporting to management. Treatment of under5over absorbed overhead, eg. Applying supplementary rate or !rite o+ to proft and loss account. 10 (or successful implementation of uniform costing system, it is the primary duty of a Trade Association of devise a cost manual containing recommended cost accounting plan. All the participant members should be invited for detailed discussion before a cost manual is fnalised. The cost manual is of immense help in guiding the participating frms to operate their accounts on uniform basis. If the industry consists of companies of similar si3e and a common range of products, it is entirely feasible to present the accounting procedure in one manual for use of all members. 9here, ho!ever, there is a great disparity in si3e of companies in an industry, it is better to issue a separate manual for large companies and one for the small. "he characteristics of a goo uniform cost manual are summari'e below:
It should present a strong case for the desirability of using uniform cost accounting methods. It should serve as a comprehensive reference book on cost accounting procedures. It should be useful to the e-ecutives5cost accountants for saving all problems in installation and e-ecution of recommended uniform costing method. 11 (ntrouction $tatement of objectives and purpose of the system. <ducation the management and people about the uniform costing system $cope of the system. ase for use of the system. Organisation 1rganisation for developing and operating the system. $tages in !hich the system is to be introduced. %anagement of the organisation by trade association or other!ise. Accounting system 0eneral principles of accounting to be adopted. Terminology to be follo!ed. 7etails of coding system. lassifcation and description of accounts. 8econciliation bet!een fnancial accounts and 12 cost accounts. Accounting period. )etho of costing *e&g& process costing, job costing, stanar costing&+ Unit of production. osting periods =e.g. monthly, .uarterly, half- yearly or annual> <-penses to be considered in costs. %ethods to be used for inter-unit transfer pricing. lassifcation of departments =)roduction department, service department, etc.> %aterial cost ? direct and indirect, treatment of idle time, treatment of fringe benefts, overtime, production bonus. 1verhead?classifcation,collection, apportionment and allocation. 7irect and indirect depreciation, method of depreciation to be used, research and development e-penditure,methodofallocation5appotionment of service department cost to production department, capacity cost etc. ,eporting& )eriodically of reports. ;evels for !hom the repors are to be sent. ost statements. 8atios ?cost as !ell as fnancial. $upplementary data. 13 Nature and extent of information to be accumulated Inter-frm comparison re.uires that all relevant and detailed cost information should be collected regarding business frm. #o defnite list of information can be suggested for collection. 4o!ever, the follo!ing are the usual information !hich are applicable to all industries and therefore can be collected for the inter-frm comparison: Information regarding cost and cost structure. ;abour e/ciency and labour utilisation. %achine e/ciency and machine utilisation. 8a! materials consumed !astage and stores- keeping. 8eturn on capital employed. ;i.uidity and li.uid resources. 8eserve and appropriation of profts. 7ebtors and creditors. %ethods of production and technical aspects. Inventory and inventory systems. Responsibility for collection, coordination and presentation of information 14 In some countries separate organisations have been established for collecting and presenting information. in India inter-frm comparison information is collected by various trade associations, chambers of commerce, the national productivity council, research and statistics division of several commerce and trade journals and periodicals and ne!spapers. Method of collection and presentation of information Information for the purpose of inter-frm comparison is usually supplied by business enterprises to organisation regularly. Information can be collected by feld !orkers also. After the information is collected, it is properly compiled and arranged and fnally a consolidated report is prepared for the beneft of business frms. (or the information to be purposeful, it is essential that participating frms should agree about the meaning of various terms used in ratios and accounting information The printing industry in U' has played a leading role in the establishment of uniform costing system 15 this industry !as frst to introduce the uniform costing system.This !as a !elcome step for introduction of inter-frm comparison in the printing industry. The industry a!as divided into various groups each having its o!n ratios based on di+erents characteristic of the frms. The division is based on the follo!ing characteristics: #ature of activities carried in the printing industry, eg, genral printers , book printers,. ne!spapers houses, and $i3e determined bu number of employees.
It is to be pointed out here that actual fgure sof proft or other details are not issued to members so that there is no betraying of confdence. <mphasis is al!ays laid on depicting the average results so that a single frm can make a comparison to see !hether its o!n ratios are e.ual, better or !orse than the average for its o!n particular group. (or each ratio the median and upper and lo!er .uartiles are computed. The principal ratios used by the principal industry in u.k are given. The benefts from inter-frm comparson include the advantages of uniform costing system and benefts 16 arising out of the use ratios. The advantages of uniform costing system has been discussed before. The follo!ing additional advantages are obtained from inter frm comparison: The e-tent of !eakness of the participating frms is reaveled. %anagement is, therefore induced to take suitable remedial actions. The participating frms give information voluntarily and !illingly in the prescribed .uestionare. The defnations of various terms are clearly e-plained to the users. Thus the results obtained from the information are accurate and capable of being compared. Inter- frm comparison promotes cost consciousness among the members of the industry. It enables the government to take measures for e+ecting price regulation. It facilitates government to grant protection to industries, !herever necessary. It introdues a sense of healthy competition among the participating frms. It provides substantial data to the members- 17 frms to present their case to government. It forces 2self searching& e-ercise among the members-frms. "he bene!ts arising from inter-!rm comparison have been outline above& (t is very goo practice 18 which promise substantial bene!ts to the members of the inustry& "he practical i-culties which are often e.perience in the implementation of (FC scheme are summari'e below& The member-frms often e-press resistance to the idea of disclosing data relating to the performance. $atisfaction !ith the present profts may bring about a sense of complaceny !hich is disastrous for active participation in the implementation of I( 9hen the companies do not follo! suitable cost acconting system,the inter frm comparison !ill not be meaningful and e+ective. #on availability of suitable basis for comparison presents problem to the introduction of I(. 19