Costing System

Cost System as Tool

After discussing cost classification in CS accounting notes, we are now discussing about costing system. Cost system is one of its topics. Cost system is the branch of cost accounting which is made for achieving the objectives of cost accounting. We know that cost accounting is to calculate and control of cost. But you think which tool of cost accounting is used for these tasks? Its answer is costing system. Now we define it.

Definition of Costing System

Costing system is that system in which we calculate different cost with different methods and also monitor cost for reducing wastage and misuse of resources.

Explanation of Costing System

We put in plain words costing system with human body’s digestion system. In this world, everything is copied from God’s original system. God has made the system for flying of birds. This system is copied by scientists and have made airplane. We see in human body’s digestion system that God made our 40 feet big intestine to grind the food for making blood. But animal’s digestion system is different from human digestion system. Same thing applies one different type of products. According to the nature of products different costing systems were developed. After study the pdf file of Yaping Ning, we get theme that costing system's historical development is based on development of product market, production technology and demand for control.

  If there is any production in which we can separate one product from other product, Specific order costing can give better result. Suppose, we receive order of 500 tables. If we have already calculated unit cost of per table under specific order costing system, we will take one minute to calculate the cost of 500 tables. If next day we receive the order of 648 tables, we can again calculate cost by multiply unit cost with numbers of units ( read more example of specific order costing system at here). But other sides, if we are working in production area in which goods are produced in large quantities and homogeneous nature in a continuous process, at that time, we have to use process costing system. Goods which are transferred from earlier process will be raw material of second process and some new cost will be added till for reaching it to finished product.


Type of Costing System

1. Tradition Costing System

Specific Order costing, batch costing and process costing is under tradition costing system.

2. Activity Base Costing System

Activity base costing system is the modern way to calculate and reduce operating the cost in which we find key activities and its cost drivers.

Installation of a Good Costing System

For installation of a good costing system, we should study following factors.

1. # Manufacturing methods and process

(Simple or complex)

2. # Size of company

(Big or small)

3. # Nature of products

(Different or same)

4. # Management control needs

(Direct or indirect)

5. # Nature of raw materials

(Perishable or durable)

6. # Comparability

(Need of compare or not)

7. # Organization structure

(Functional or traditional)