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Uniform Costing

Question 1 Define uniform costing. What are the essential requisites for the installation of a uniform costing system? (Nov., 2000, 2007, 6, 4, marks) Answer Uniform Costing 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. 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. 2. 3. The firms in the industry should be willing to share /furnish relevant data /information. A spirit of co-operation and mutual trust should prevail among the participating firms. 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 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. Question 2 Explain in brief the advantages and limitations of uniform costing. (November,1996, 98, 99, May,2001,2004, 4 marks)

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Answer Uniform costing refers to the use of the same costing principles and practices by s everal 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. Advantages of uniform costing: (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. Limitations of uniform costing: (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.

Uniform Costing

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(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. Question 3 Write a short note on uniform costing. Answer Uniform Costing: It has been defined by the Institute of Cost and Works Accountants of England as The use by several undertaking of the same costing princi ples and/or practices. Thus when a number of undertaking, whether under the same management or not, decide to adhere to one set of accepted costing principles especially in matters where there can be two opinions they are said to be following uniform costing. It makes inter firm comparison easy and, of course, one of the aims of uniform costing is to introduce inter-firm comparison. Use of uniform costing is comparatively easy among concerns manufacturing the same type of products. A great deal of spade work is required to be done before the introduction of uniform costing in an industry. Its introduction helps the firms to submit reliable cost data to price fixing bodies to determine the average cost and fixing the fair selling prices of various produc ts. It serves as a pre-requisite to cost audit. Question 4 State the essential pre-requisites for the installation of uniform costing system in an industry? (November, 2002) (5 marks) Answer The essential pre-requisites for the installation of uniform costing system in an industry are (i) Firms in the industry should be willing to share / furnish relevant information. (ii) A spirit of cooperation and mutual trust should prevail among participating firms. (iii) Exchange of ideas and methods, share of achievements in areas of efficiency and research, should be frequent. (iv) There should be no jealously or rivalry among the participating units. (v) Bigger firms should take the lead towards sharing their experience with the smaller firms. Question 5 What are the requisites for installation of a Uniform Costing System? (May 1996, 6 marks) Answer Requisites for the installation of a uniform costing system: (i) The firms in the industry should be willing to share/furnish relevant data/information (ii) A spirit of cooperation and mutual trust should prevail among the participating firms (May, 1996, 3 marks)

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(iii) Mutual exchange of ideas, methods used, special achievements made research and know-how etc., should be frequent. (iv) 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. (v) Uniformity must be established with regard to several points before the introduction of uniform costing in an industry. In fact, uniformity should be with regard to following points. 1. 2. 3. Size of the various units covered by uniform costing. Production methods. Accounting methods, principles and procedures used.

Question 6 Write notes on points on which uniformity is essential before introducing uniform costing. (May, 1998, Nov.2002, 4 marks) Answer Points on which Uniformity is essential before introducing Uniform Costing : 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: 1. 2. 3. 4. 5. 6. 7. Identifying stages of production where costs are to be measured. Same methods of valuing inventory should be used. Cost unit. Classification of costs and its components. Identifying methods of pricing material issues. Methods of remunerating and providing incentives to labour. Basis of allocation and apportionment of overheads.

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8. 9.

Basis of distribution and redistribution of overheads. Methods of depreciation.

10. Treatment of notional expenses 11. Treatment of material losses. 12. Allocation / apportionment of joint costs. 13. Preparation of cost statements, reports and their submission schedule. Question 7 Enumerate the points on which uniformity is essential before introducing uniform costing system? (May, 2002, 4 marks) Answer Points on which uniformity is essential before introducing uniform costing system are: 1. 2. 3. 4. 5. The firms in the industry should be willing to share / furnish relevant data/ information. A spirit of cooperation and mutual trust should prevail among the participating firms. Mutual exchange of ideas, methods used, special achievements made, research and know-how etc. should be frequent. 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. Uniformity must be established with regard to several points before the introduction of 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. Question 8 Write short notes on Uniform Cost Manual? Answer Uniform Cost Manual: 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. (Nov., 1994) (4 marks)

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The following are the salient features of a uniform cost manual. 1. 2. It includes statement of objectives and purpose of the system, scope of the system, advantages and extent of co-operation necessary. It contains the general principles of accounting, nature coding, terminology to be followed, classification and description of accounts. This section also includes details of stock control, labour and overhead cost collection and control. Essential cost data and various ratios to be computed for comparison of performance and efficiency in the operation of the participating units. Mode, format and time for presenting cost data and reports to the management. It provides necessary guidelines about the treatment of depreciation, interest on capital, wastage, scrap, by-product, etc.

3. 4. 5.

Question 9 A firm of printers is contemplating joining the uniform costing system being operated by its Trade Association but the Managing Director is doubtful about the advantages of becoming involved in the scheme. Prepare a report to the Managing Director describing the advantages that the firm is likely to gain. (Nov., 1995, 7 marks) Answer Dated . From : Cost Accountant Re : Report on the advantages accruing from becoming a member of uniform costing system operated by the Trade Association I heard that you are contemplating of joining uniform costing system operated by Trade Association. I also support this idea of joining such a system because of multiple benefits which would accrue from it. Such a step would strengthen not only the capability of decision making of our executives but may also enable them to achieve other cost accounting objectives. The main advantages of joining uniform costing system group are as follows: 1. 2. Saved from the exercise of developing and introducing an individual costing system. A costing system devised by mutual consultation and after considering the difficulties and circumstances prevailing in different firms may be readily adopted and successfully implemented. A comparison of cost figures of various firms of the system will facilitate the firms to identify their weak and strong points besides controlling costs. Standing of the firms in the industry would be known by making a comparison of its cost data with others.

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5. 6.

Research and development benefits of bigger firms may be made available to smaller firms. It helps Trade Associations in negotiating with the Government for any assistance or concession in the matters of taxation, export subsidies, duties and price determination etc. Unhealthy competition is avoided among the firms in the same industry in framing pricing policies and submitting tenders. Prices fixed on the basis of uniform costing are representative of the whole industry. Facilitates the reduction of labour turnover, as a uniform wage system is the precondition of a uniform costing system.

7. 8. 9.

10. It provides a basis for the comparative assessment of the performance of two firms in the same industry but in different sectors. 11. It will facilitate the development/introduction of information system. 12. Optimum achievement of efficiency may be attempted by utilising the experience of other concerns in the system. Question 10 Explain, what do you understand by uniform costing? Discuss the points in respect of which uniformity is required to be established before introduction of uniform costing in an industry. Answer Uniform Costing has been defined by the Institute of Cost and Works Accountants of England as The use by several undertakings of the same costing principles and/or practices Thus when a number of undertakings, whether under the same management or not, decide to adhere to one set of accepted costing principles especially in matters where these can be two opinionsthey are said to follow uniform costing. It makes inter-firm comparison. Use of uniform costing is comparatively easy among concerns manufacturing the same type of products. A great deal of spade work is required to be done before the introduction of uniform costing in an industry. The consideration of the following points is a must before the introduction of uniform costing in an industry. (i) Classification of various units according to size : The various units to be brought under a system of uniform costing may differ both in size and in their organisational set-up. Therefore, it is desirable to classify such units according to their size. If this is not done, the cost statements prepared would not be comparable since cost structure of firms varies according to their size. Uniformity in methods and principles used for measuring output and collecting costs: For the introduction of uniform costing system it is necessary to bring uniformity in cost collection and its determination. These objectives may be achieved by establishing uniformity in respect of the following points.

(ii)

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(a) Establishing the stage of production at which costs may be measured. A clear-cut instruction in this regard is quite useful. (b) Identifying methods to be used for quantifying production, specially with regard to workin-progress. (c) Determination of cost unit to which cost should be related. (d) Classification and grouping of expenses. (e) The principles to be followed while determining direct and indirect expenses and variable and fixed expenses. (f) Basis of apportionment of expenses. It is important to specify the method by which the various overheads would be apportioned over various departments and cost units.

(g) The basis for charging service department expenses to production departments. (h) The method of depreciation to be followed. (i) (j) (k) National expenditure to be considered and expenses to be ignored in cost accounting. Standardisation of cost statements, forms and their submission schedule. The treatment of wastages, scrap, by-products, overtime, donations, and under or over absorbed overheads.

From the foregoing it is apparent that it is essential to bring uniformity in respect of the above points before introducing uniform costing in an industry.