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Uniform costing

Uniform costing

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Uniform costing

  2. 2. 2 INTRODUCTION Uniform costing is the application of the same accounting and costing principles, methods or procedures uniformly by various undertakings in the same industry. It is a particular technique which applies the usual accounting methods like standard costing, marginal costing, and budgetary control. Uniform Costing: It is not a distinct method of costing when several undertakings start using the same costing principles or practices, they are said to be following uniform costing. Different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good and helps in mutual cost control and cost reduction. Hence, it is recommended that a uniform method of costing should be adopted by the member units of an industry Different types of costing principles and the practices are used by different industries to suit their requirements. However, for comparing the achievements, costs, targets, profitability etc, within the firms, it is essential that same set of principles and practices are adopted by all the firms within an industry. The use by several undertakings of the same costing principles and/or practices is called as uniform costing. It is usually expected in case of a uniform costing system that all firms within an industry include the same items in cost, apply similar methods of distribution of overheads, adopt the same items in cost, apply similar methods of distribution of overheads, adopt the same general classification of accounts, install similar forms and procedures, and present similar statements. The service departments and producing departments are classified on the same pattern in all the firms. The policy regarding the treatment of overhead items is also fixed in general. Uniform costing is neither a costing method like job or process costing nor it is a costing technique like standard costing or marginal costing but a particular system which may combine any of the costing methods and any one or more techniques of costing. The question of the application of uniform costing arises only when two or more units want to follow the same costing practices. These units should be engaged in the same activity. They may be owned or managed by one group or different groups. For example, a number of sugar mills owned or managed by one group may adopt a uniform costing system or different companies engaged in sugar industry may, through a common representative association, agree to follow a uniform costing pattern. The working of the system in the former case will be simpler as
  3. 3. 3 compared to the latter. This is because in the latter case the units are not under the same management and therefore the arrangement is purely voluntary Uniform Costing is not a distinct method of costing, Infact when several undertaking start using the same costing principles and / or practices, they are said to be following uniform costing. The basic idea behind uniform costing is that the different concerns in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good. The principles and methods of compilation, analysis, apportionment and absorption of overheads differ from one concern to the other in the same industry, but if a common or uniform pattern is adopted by all, it helps mutually in cost control and cost reduction.
  4. 4. 4 MEANING OF UNIFORM COSTING Uniform costing is not a method of costing like marginal costing or ABC. But it is good costing system to operate a business in which all the companies in any industry follow the same type of costing principles and methods. For example, we talk about electrical industry. Bajaj International Private Ltd, Bharat Heavy Electricals Limited (BHEL), Centre for Electronics Design and Technology and Crompton Greaves Limited (CGL)are the main electrical companies. If these companies join and make a costing system in which they will use same costing methods and techniques, then it will be said that these are following uniform costing. With this, these companies reduce unhealthy competition. Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but its primary function is for use by managers to facilitate making decisions. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles(GAAP). As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.
  5. 5. 5 Conceptand Objectives: Uniform costing is not a particular method of costing. It is adoption of common accounting principles and in some cases common methods by member companies in the same industry so that their cost figures may be comparable. Uniform costing can be defined as the ‘use by several undertakings of the same costing principle and practices’. In other words, it is a technique or method of costing by which different firms of a field or industry apply similar costing system so as to produce cost data which have maximum comparability. Standard costs may be developed and cost-control is secured in firm through mutual comparison. Relative efficiency and inefficiencies in production may be identified and suitable steps may be suggested to control and reduce the cost. The objectives of uniform costing are to standardize accounting methods and to assist in determining suitable prices of products of firms which adopt this method. Thus objects of a uniform costing systemare: (a) It provides reliable data for making inter-unit comparisons of cost performances. (b) It helps to arrive at the cost of production for the industry as a whole on a common basis acceptable to all individual units or firm of the industry. (c) It provides data to compare the cost of production and the production efficiencies between one firm and others. (d) It ensures that the product prices are based on authentic costing data. a. Facilitates Comparison b. Eliminates Unhealthy Competition c. Improves Efficiency d. Provides Relevant Data e. Ensures Standardisation f. Reduces Cost
  6. 6. 6 The techniques of uniform costing may be introduced with one or more of the following objectives: 1. To avoid competition: It eliminates cut-throat competition by fixing common prices on the basis of uniform costing procedures. It thus also aims at bringing stability in prices of the products. 2. Costcomparison: It enables different firms to compare the costs because the costs are based on same principles. Thus, their profitability can also be compared. 3. Measurementof efficiency: Comparison of costs and profitability helps in measurement of efficiency. Uniform costing enables the member participants to use this system as yardstick of their achievements and performances. 4. Reliable prices: The confidence is reposed in the public where the prices fixed are based on sound and uniform costing principles. This will result in better and cordial relations between members adopting this system and their customers. 5. Costcontrol: One of the objectives of uniform costing is an effective control over costs. This facilitates location of unprofitable ventures. Uneconomies and inefficiencies are revealed at every stage. The uniform cost serves as the standard costand helps in controlling the off-standard performances. 6. Betterexchange of information: Members having technical knowledge provide the benefit of their experience to others. Free exchange of information leads to reduction in costs and improvement in the quality of the product.
  7. 7. 7 Application of Uniform Costing (Scope): Uniform costing may be applied in two different situations. (a) Common Control and Management: Uniform costing may be applied when number of units or firm producing similar goods and services are under a common control or controlled by the same group of management. (b) Trade Associations: Uniform costing may be adopted by firms or units which are related to a trade association. Different firm may form an association through which they may adopt common costing method and practice. Even though cost accounting is commonly referred to as a costing method, the scope of cost accounting is broader than just costing. In cost accounting, there are elements of traditional bookkeeping, system development, creating measurable information and input analysis. Modern methods of cost accounting were first prevalent in the manufacturing industries, though its advantages helped it spread to other sectors quickly. For many firms, cost accounting helps create and measure business strategy in a symbiotic, endogenous way. Financial accounting and cost accounting systems can be differentiated based on their respective target audiences. Financial accounting is designed to help those who don't have access to inside business information, such as shareholders, lenders and regulators – the consumers who analyze financial statements. Alternatively, cost accounting is meant for those who are inside the organization and are responsible for making critical decisions. There is no legal requirement for cost accounting (unlike financial accounting for publicly traded firms); companies use it because it's highly advantageous to do so. It's much easier for a business to know how to use its resources better when it can track them, measure them and study their effects. This is what cost accounting provides.
  8. 8. 8 Requisites of Uniform Costing: Uniform costing can be adopted if certain pre-conditions exists. The success of a uniform costing system depends primarily on the cooperation extended by different units or firm towards the working of the system. Every unit should agree to supply required accounting and costing information without reservation to a central body formed by them for implementation of the uniform costing scheme. This body has to correlate, analyze and consolidate the information received from the different units. Following are pre-requisites of uniformcosting: (a) Firms or units adopting uniform costing must be ready to provide and share accounting and costing information freely. (b) They should adopt a common system of costing regarding classification, distribution and absorption of costs. They must agree on a common technique of costing e.g., absorption costing, standard costing or marginal costing. (c) The firms must use a common terminology and procedure for cost ascertainment and cost control. (d) There should not be any restriction from the Government in adopting uniform costing. (e) A central body or proper organisation must be set up for preparing comparative statistics for the use of member units participating in the uniform costing. (f) Above all, the most important is that units or firms must have mutual trust, confidence and cooperation. The essential requisites for the installation of uniform costing system A successful system of uniform costing requires the following essential requisites for its installation: 1. The firms in the industry should be willing to share /furnish relevant data /information. 2. A spirit of co-operation and mutual trust should prevail among the participating firms. 3. Mutual exchange of ideas, methods used, special achievements made, research and know-how etc. should be frequent. 4. Bigger firms should take the lead towards sharing their experience and know-how with the smaller firms to enable the latter to improve their performance. 5. Uniformity must be established with regard to several points before the introduction of
  9. 9. 9 uniform costing in an industry. In fact, uniformity should be with regard to following points (a) Size of the various units covered by uniform costing. (b) Production methods. (c) Accounting methods, principles and procedures used.
  10. 10. 10 Key Factors: The success of uniform costing depends on certain key factors which would be peculiar to each unit. These factors are uniformity in method of production, the size of organisation and accounting method. The Method of Production of units should be uniform. Besides similarity in output, the types of machinery used should be identical. The difference in the type of machinery used will create variation in the efficiency and therefore in costs. There may be some other varying factors in production. Unless these factors are leveled out by giving weight-age on an equitable basis the object of uniform costing will not by served. The Size of Organisation of participating units should not be different. If production capacities of units are widely different, they cannot follow the same principles and practices. The Accounting Method of different member units should be identical. If the accounting method is different, the information needed for uniform costing may not be available within reasonable time and frequency without unnecessary delay. Standardisation: The essential feature of Uniform Costing is adoption of standardised principles and methods of cost accounting by different units introducing the method. The standardisation may extend tofollowing: 1. Method of Cost Accounting e.g., job costing, process costing or a variation of one or both of these. 2. Accounting classification including coding. 3. Content of each account. Methods of defining costs: (a) Direct material (b) Direct labour (c) Direct expenses (d) Overhead costs regarding factory, selling, distribution, administration, research and development.
  11. 11. 11 5. Methods of recovering depreciation. 6. Methods of allocating and/or apportioning overheads costs to cost centres and jobs or products 7. Material control including the pricing of issue and valuation of stocks. 8. Methods of recording accounting data e.g., integrated accounting system. 9. Reports and statements for planning and control. 10. System of remunerating labour e.g., time rate or piece rates. 11. A Central Body should be established for carrying out the work of uniform costing. The standardisation should be achieved by developing a ‘ Uniform Costing Manual’
  12. 12. 12 Uniform CostManual It is a written document, which may be in the form of a booklet or bulletin, containing the principles, methods and procedures for the ascertainment and control of cost in uniform costing. It is necessary for the successful operation of uniform costing system. Such a manual provide guidelines to the participating firms to organise their cost accounting system on a uniform basis. Uniform cost manual is a document which lays down the general accounting principles, methods and procedures for the ascertainment and control of cost. The circulations of this manual provide the guidelines to the organisation to formulate their system of accounting in such a way that the principles of uniform costing can be uniformly and correctly applied. The following are the salient features of a uniform costmanual. 1. It includes statement of objectives and purposeof the system, scopeofthe system, advantages and extent of co-operation necessary. 2. It contains the general principles of accounting, nature coding, terminology to be followed, classification and description of accounts. This section also includes details of stockcontrol, labour and overhead costcollection and control. 3. Essential costdata and various ratios to be computed for comparison of performance and efficiency in the operation of the participating units. 4. Mode, format and time for presenting costdata and reports to the management. 5. It provides necessary guidelines about the treatment of depreciation, interest on
  13. 13. 13 capital, wastage, scrap, by-product, etc. Following are the contents of Uniform costmanual: - Introduction - Organization - CostAccounting System - Presentation of Information - Miscellaneous
  14. 14. 14 Uniform Costing: Difficulties, Advantages and Limitations! Difficulties: The introduction of Uniform Costing systemfaces a number of difficulties since the cost structure of participating units or firm may vary due to following factors: 1. Difference in Size of the Firm and the Organization Structure: The difference in the size of firms will result in difference in the division of work and process of output. Larger firms may have more division of work than that of smaller firms in the same process. The number of departments and supporting services will be more in a large firm than the smaller ones and this will result in higher overhead cost. Moreover, a large size firm can achieve economies of bulk purchase which will not be available to the small firm. 2. Difference in Technology: There may be difference in the technology used by member firms. Firms using more sophisticated plant may lead to greater division of work into process. Their nature and sequence of work will also differ from firms adopting less sophisticated technology. 3. Difference in Range of Products: A firm may produce only a few varieties of products whereas the other may produce large number of varieties of products. The firm producing large variety will be in advantageous position with regard to distribution of overheads. 4. Difference is the Level of Productivity and Efficiency: Levels of efficiency and productivity may vary from firm to firm depending upon skilled and experienced personnel, their tracing, supervisor, motivation and cooperation of trade union. 5. Difference in Managerial Planning and Growth Rates: There may be different growth rates of the member firms. With the result, the planning of each firm may be different in terms of costing and pricing while uniform costing requires common pricing system.
  15. 15. 15 6. Difference in Costing Methods and Principles: There may be difference in costing principle and procedure adopted by member firms. For example, a firm may recover overheads on the basis of direct wages whereas another may recover overheads on labour hour rate or machine hour rate which may result dissimilarity in costs of the same type of product. Uniform costing depends upon elimination of such differences. These differences can be eliminated by application of common principles and procedure by member firms. 7. Difference in Geographical Situation: In a big country regional difference create difference in cost structure of different firms. There may be availability of cheap labour, nearness to raw material, advantage of market and favourable climate to some firms. Many states may offer concessions in power rates, interest rates, tax rates. All these factors will create difference in the cost structure. These require reconciliation before implementation of costing structure.
  16. 16. 16 Advantages of Uniform Costing: In brief, the advantage of uniform costing system are achievement of greater operating efficiency through common understanding of cost and a competitive spirit introduced by comparison of cost, adoption of realistic pricing policies and establishment of the best methods and principles of costing. Uniform costing refers to the use of the same costing principles and practices by several undertakings. These undertakings may or may not be under the same management. Adherence to the same costing methods and procedures specially when there can be two or more options is the characteristic feature of a uniform system of costing. The following are various advantages of uniform cost accounting system: 1. Uniform costing helps member firms to adopt one of the best methods of cost accounting system known to the industry. This eliminates unsound methods and also saves cost required in perfecting systems through expensive trial and error or experimentation. 2. Uniform costing tends to convince the member firms for adoption of method used by the competitors. 3. Uniform costing develops better informed and healthy competition within the industry which results in control and reduction of cost. 4. Uniform costing provides the members with all benefits of sound costing system. On the basis of available reliable cost information, product pricing is taken up on sound basis. It checks unhealthy competition and price-cutting below costs. Moreover report is provided for comparison of major cost items with predetermined standard costs. It helps in controlling costs and increasing operating efficiency. The system also provides information which guide to the performance and efficiency of labour, machine and methods.
  17. 17. 17 5. Uniform costing system reveals unprofitable products or product lines and provides valuable information to strengthen them. 6. Uniform costing also creates confidence in the customers that prices have been fixed with reliable data of costs. 7. Uniform costing enables regulatory bodies and government to collect required data relating to the industry. Thus uniform costing is a useful tool for managerial control, performance appraisal and standardization of operation in the industry. It avoid cut-throat competition. Weaker member units can avail advantage of the efficient methods of production, cost control and the research and development in the field. For members units (a) Fixation of selling prices: Accumulation of cost data on sound principles helps in determining selling on a uniform basis to suit the requirements of all the participating firms. (b) Healthy competition: Removal of rivalries and enmities inculcates a spirit of healthy competition. (c) Improvement in efficiency: Areas of inefficiencies or Uneconomies are located out and thus efforts for improving efficiency can be made. (d) Cost consciousness: The member-firms realize the importance of controlling costs. This feeling of cost consciousness brings reduction in costs. (e) Benefit to weaker units: Those participants who do not have expert knowledge of products can gain it from others. Research and development division of large concerns provides useful information to small concerns.
  18. 18. 18 (f) Management control: Cost comparison helps the management in knowing the points of their weaknesses and thus enables them to exercise better control over the operations of the business. (g) Profitability measurement: Unprofitable ventures are disclosed, the levels below which the firm shall operate at a loss are known. Thus, uniform costing serves as an insurer of profits. (h) Economy: The concerns can appoint a cost expert or consultant jointly and share such costs on a common basis. Thus, it economises the cost of obtaining expert’s advice about costs. The management of each firm will be saved from the exercise of developing and introducing a costing system of its own. A costing system devised by mutual consultation and after considering the difficulties and circumstances prevailing in different firms is readily adopted and successfully implemented. It facilitates comparison of cost figures of various firms to enable the firms to identify their weak and strong points besides controlling costs. Optimum achievement of efficiency is attempted by all the firms by utilising the experience of other concerns in the industry. Standing in the industry of each firm will be known by making a comparison of its cost data with others. Services of cost consultants or experts may be available jointly to each firm in the industry by sharing their experiences and expenses. Research and development benefits of bigger firms may be made available to smaller firms. It helps in the reduction of labour turnover, as a uniform wage system is the precondition of a uniform costing system.
  19. 19. 19 It helps Trade Associations in negotiating with the Government for any assistance or concession in the matters of taxation, exports, subsidies, duties and prices determination etc (i) The management of an individual firm / unit will be saved of the botheration of developing and introducing a costing system of their own. (ii) A uniform costing system for the firms in the same industry is provided for the adoption of such undertakings. Since the system is devised by manual consultation and after considering the difficulties and circumstances prevailing in the various undertakings, therefore it is readily adopted and successfully implemented. (iii) It facilitates comparison of cost figures of various firms. Such a comparison enables the firms to identify their weak and strong points and control costs effectively and efficiently. (iv) The availability of cost data of other firms in the industry enables each firm to know its standing in the industry. (v) The benefits of research and development of bigger firms are made available to smaller firms at no cost. (vi) This system of costing requires the introduction of a uniform wage system in all the firms in the industry. The introduction of a uniform wage system reduces labour turnover. (vii) It helps trade associations in negotiating with the government in trade matters, particularly, when an industry seeks any assistance or concession from the government in matters of subsidies, exports, taxation, duties and price determination, etc. (viii) Uniform costing is of great help in price fixation. Unhealthy competition is avoided between the firms in the same industry in framing policies and submitting tenders. (ix) It helps the government also in regulating the prices of essential and important items such as bread, flour, sugar, cement and steel etc.
  20. 20. 20 Limitations and Disadvantages ofUniform Costing: Uniform costing is sometimes opposed due to a number of problems and difficulties. Standardization of definition and method is the key factor of uniform costing but it is difficult to accomplish. Moreover if standardization is achieved, there is great difficulty in fitting the method into the framework of each individual business because many differences exist such as age of plant, geographical location, availability of labour etc. How can a firm working with manual labour be compared with a highly mechanized firm? Following points may be noted as limitations of the method: (1) The arguments generally advanced against the use of a uniform costing systemare: (a) Sharing of confidential data with other competitors in the industry; (b) Accounting inconveniences arising out of each individual unit having own principle and practice which may be different (c) The limited advantages which an unit can derive from the scheme. From the standpoint of the society, the disadvantage of uniform costing is formation of trade association by firm’s just too restraining trade and impending competition.Uniform costing generally creates conditions which develop monopolistic tendencies under trade association. These associations may raise prices arbitrarily. The practises and methods followed by various units in the industry vary from one unit to another. - Cost of installation and operation of uniform costing system are high for small units thus they cannot afford it. - If any reservation is made while giving certain information then the statistics presented cannot be relied upon. - It may create situations which may lead to monopolistic tendencies resulting in higher prises and curtailed supplies.
  21. 21. 21 (i) Due to the differing circumstances in which firms operate, it is difficult to have uniform standards, methods and procedures of costing. This renders the adoption of uniform costing difficult. (ii) Adoption of a uniform costing system requires various firms to disclose their cost and other data. Some of the firms do not like this and are thus hesitant towards the use of this costing system. (iii) Small firms feels that uniform costing system is meant only for large and medium size firms and thus they cannot afford it. (iv) Some feels that the use of this system of costing may lead to monopolistic tendencies resulting in artificially raised higher prices and curtailing supplies The following are the areas where uniform costing canbe implemented: In method of pricing the issues In method of costaccounting In costing techniques In methods which are used for valuation of inventories. Methods of remunerating workers. Methods used for inventory control Methods used for valuation of inventories Methods used for charging depreciation
  22. 22. 22 Methods for apportionment and absorptionof overheads Treatment given to research and development costs, material scrap, wastes and defectives.
  23. 23. 23 AREAS OF UNIFORMITY Uniformity in the size of varations units where uniform costing is to be introduced: The size of units which are to be brought under uniform costing should more or less the same units differing in size should be classified in a number of categories according to their size Since the cost structure in an organization is influenced by its size the classification of units based on their size would make the cost statements of these units more comparable Uniform in the production method All units in an industry should use uniform methods of production Uniformity in the according method principles and procedures: IDENTIFYING STAGES OF PRODUCTION WHERE COSTS ARE TO BE MEASURED. COST UNIT CLASSIFICATION OF COST AND ITS COMPONENTS. METHODS OF DEPRECIATION. TREATMENT OF NOTIONAL EXPENSES. IDENTIFYING METHODS OF PRICING MATERIALS ISSUES. BASIS OF DISTRIBUTION AND REDISTRIBUTION OVERHEADS.
  24. 24. 24 Points on which Uniformity is essential before introducing UniformCosting The points in respect of which uniformity is required to be established before the introduction of uniform costing in an industry are as below: (i) Uniformity in the size of various units where uniform costing is to be introduced: The size of units should be more or less the same which are to be brought under uniform costing. Units differing in size should be classified in a number of categories according to their size. Since the cost structure in an organisation is influenced by its size, the classification of units based on their size would make the cost statements of these units more comparable. (ii) Uniformity in the production method: All units in an industry should use uniform methods of production. (iii) Uniformity in the accounting method, principles and procedures: In fact, the uniformity should be achieved in respect of following: Identifying stages of production where costs are to be measured. Same methods of valuing inventory should be used Methods of remunerating and providing incentives to labour. Basis of allocation and apportionment of overheads.. Treatment of material losses. Allocation / apportionment of joint costs. Preparation of cost statements, reports and their submission schedule.
  25. 25. 25 CONCLUSION Uniform Costing is not a distinct method of costing, Infact when several undertaking startusing the same costing principles and / or practices, they are said to be following uniformcost ing. The basic idea behind uniform costing is that the different concerns in an industryshould adopt a common method of costing and apply uniformly the same principles andtechniques for better cost comparison and common good. The principles and methods of compilation, analysis, apportionment and absorption of overheads differ from one concern tothe other in the same industry, but if a common or uniform pattern is adopted by all, it helpsmutually in cost control and cost reduction
  26. 26. 26 BIBLIOGRAPHY: 1. M. Com Part 1 Manan Prakashan Publications Advanced Cost Accounting by Dr.Varsha Ainapure. WEBILOGRPHY; WWW.GOOGLE.COM WWW.SLIDESHARE.COM

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