Uniform Costing Prepared by Ramnath Natesan Iyer

Uniform costing is defined as “the use by several undertakings of the same costing system, i.e. the
same basic costing methods, principles and techniques.”

It is not a distinct method of cost accounting like job costing or process costing or contract costing
etc. It refers to an arrangement under which several undertakings use the same costing system.

Objectives of a uniform costing system

(i) To make available reliable cost data for inter-unit and inter-firm comparison.
(ii) To help an individual firm/unit to evaluate its performance by comparing its operating
cost data with an industry average.
(iii) To identify the profitability of individual products in an industry.
(iv) To reinforce confidence among the consumers that the prices of various products are
fixed on the basis of reliable cost data.

Scope of a Uniform Costing system

Uniform costing system can be adopted by different manufacturing units or branches of an

undertaking and different concerns which are members of the same trade/business association and
industries which are similar in nature. It is of utmost importance to compare the performance of
various units and without the adoption of a uniform costing system a meaningful comparison will
not be possible. The members of various trade associations share their experiences as to the
operating efficiency which also necessitates the adoption of a uniform costing system. It also
facilitates the submission of cost data to various Government agencies including price fixing
agencies.

Thus, wherever there is a need to compare the performance of various units/firms or to maintain
data bank for common use by various units/firms a uniform costing system must be adopted by
such units/firms which shall make use of the data.

Factors to be covered under a Uniform Costing System

There is nothing like a generally accepted scope of a uniform costing system. No costing system can
fit into every situation because of various causes explained below. Therefore , there cannot be
uniformity in all respects of cost accounting principles, methods and techniques to be used by
member units/firms.

The level of uniformity depends upon the purpose of installing the uniform costing system. For
example, if the purpose is fixation of common prices, uniformity in determining product cost would
be sufficient. If the purpose is to compare the operating efficiency of various cost centers the scope
of uniformity would be much wider.

Though the exact level of uniformity varies, the installation of any uniform costing system requires
uniformity usually in the following areas

(i) Method of costing to be applied

(ii) Technique of costing (such as standard costing, historical costing ) to be employed
(iii) Accounting classification including codification
(iv) Definition of cost centers
(v) The cost unit to be adopted
(vi) Methods of defining the various elements of cost ,i.e. direct material, direct labour,
direct expenses, manufacturing overhead, selling overhead, distribution overhead,
administrative overhead
(vii) Method of recovering depreciation
(viii) Method of allocation/apportionment and absorption of manufacturing overhead
(ix) Method of applying administrative, selling and distribution overhead
(x) Method of accounting of research and development expenses
(xi) Methods of inventory control, including pricing and valuation of materials
(xii) Accounting of spoilage, defective work, scrap and wastage
(xiii) The method of valuation of work-in-progress
(xiv) The method of remunerating the workers
(xv) Accounting of interest on capital, notional rent of owned building
(xvi) Expenses to be excluded from costs
(xvii) The method of recording accounting data e.g. integrated, non-integrated
(xviii) Reports and statements for planning and control

Difficulties in adopting a uniform costing system

(i)Difference in size and organizational set up

In a small firm several functions are often combined by a single individual while in larger
organizations a single function is divided into individual components or elements and an individual
is made responsible for performing a single component/element e.g. in a small firm the chief
executive looks after all the functions including manufacturing, sales, purchases and manufacturing
whereas in a large organization the management is entrusted to a team of specialists drawn from
various fields.

The spending level of large organizations especially in the area of discretionary costs such as
research and development, staff welfare expenses is higher in larger organizations as compared to
that of smaller firms

(ii) Difference in wage structure

Wage structures, pay scales and methods of remuneration are likely to differ among organizations.
These differences result in employees cost and overhead

(iii)Difference in methods of production and degree of automation

Usually a product can be manufactured by using various methods of production and sometimes even
from different raw materials. Obviously cost structures would definitely vary with variation in the
methods of production/use of different raw materials. The degree of automation is not likely to be
the same for all the units/firms and this also results in variations in the cost structure.

(iv)Difference in methods and principles of cost accounting

Various choices are available for accounting treatment of different cost elements and as different
organizations adopt different methods, cost structures differ.

Factors for successful implementation of a uniform costing system

(i) There should exist a spirit of mutual trust and co-operation and a policy of give and take
among member units/firms.
(ii) There should be free exchange of information, ideas and technical knowledge among all
the members/units.
(iii) There should be no feeling of jealousy or rivalry among the members.
(iv) Well managed and larger firms should be ready to share with smaller firms the benefits
of research and development and know-how.

Advantages of a uniform costing system

(i) It helps members to adopt and develop the best accounting methods and techniques
known to the industry. New entrants get a readymade cost accounting system
(ii) It facilitates inter-firm comparisons and thus helps members to identify the areas of
weaknesses.
(iii) It assists in the standardization of operations and performances in the industry
(iv) It avoids cut-throat competition and helps to develop general guidelines for price
fixation
(v) It provides a standard for the preparation of cost sheets and thus facilitates the
settlement of claims under cost plus contracts
(vi) It creates cost-consciousness among the staff of member units
(vii) It facilitates the pooling of knowledge and resources and smaller units are benefitted
from the knowledge acquired by well established and large units through their
research and development activities
(viii) It helps in furnishing realistic cost data to Government agencies and other authorities
and thus ensures fair decisions from them
(ix) It creates customers’ confidence that prices fixed by the industry are based on correct
cost data
 Limitations of Uniform costing

(i) If the differences among the member units are so wide that either these cannot be
eliminated or cannot be overcome, the scope of uniform costing gets so much reduced
that no significant benefit can be derived from the same.
(ii) For smaller units, the benefits may not be commensurate with the cost of installing and
operating the system.
(iii) If due to lack of mutual trust and confidence, members tend to withhold some
information on grounds of privacy or secrecy, the system loses its usefulness
(iv) Uniform costing may create monopolistic conditions

Uniform Cost Manual

For the successful implementation and effective management of a uniform costing system the
central coordinating organization issues the uniform cost manual containing the uniform cost
accounting plan agreed to by the members. The uniform cost manual serves as a formal evidence of
the plan agreed upon and used as a guide book for installing and operating the uniform costing
system. If members belong to the same industry and are similar in size a single manual would serve
the purpose. However, if members belong to different industries or there is great disparity in sizes, it
is appropriate to issue separate manuals, one for each category of members.

A good manual brings out the objectives and benefits of operating a uniform costing syste and lays
down the plan is such details that it can be used as a reference book in solving all problems in
installation and execution of the system.

The following are the main and sub-headings for a typical uniform cost manual

. 1. Introduction

Statement of objectives and the purpose of the system

Scope of the system

Advantages to be derived from the system

Educating the management, executives and cost accountants to appreciate the system

The extent of co-operation desired for effective operation of the system

2. Organization

Organization for developing and operating the system: stages in which the system is to be

introduced

Management of the central coordinating organization

3. Accounting System

General accounting principles

 Accounting terminology

Account headings

Code structure

Accounting period

Method of reconciliation between financial and cost accounts

4. Cost Accounting system

Cost unit

Classification of cost centers

Methods of cost accounting

Labour accounting

Items to be excluded from cost

Allocation, apportionment, re-apportionment and absorption of manufacturing overhead

Accounting of administrative overhead

Accounting of selling and distribution overhead

Accounting of research and development expenses

Method of book-keeping

5. Presentation of information

Forms and contents of reports and statements

Periodicity of reports

Cost statement

Cost and other financial ratios

Supplementary information

6. Miscellaneous
 Inter-Firm Comparison

Inter-firm comparison is the technique of identifying the strengths and weaknesses of a firm by
comparing the performance, efficiencies, costs and profits of various firms in a particular industry.
Though budgetary control and standard costing systems are useful and effective tools for planning
and control, yet, they often fail to throw light on areas of potential improvements and potential
weaknesses. Inter-firm comparison makes up for these shortcomings of any control system
operating within the organization.

Procedure involved in inter-firm comparison

1. A central coordinating organization collates, analyses and interprets data collected from
various participating organizations
2. The management of various participating organizations is provided with information which
enables them to determine the efficiency being achieved by comparing the performance of
participating firms.
3. Weaknesses are highlighted by bringing out the possible causes of variation in results among
various firms.
4. Financial and cost ratios are used extensively.

Purpose of inter-firm comparison

The purpose of inter-firm comparison is improvement in efficiency.

Management of businesses are sometimes vexed with questions such as whether the profit

is adequate, how efficient is marketing and how efficient is production. Inter-firm comparison
attempts to provide answers to these questions.

By comparing its own return on capital employed with the industry average and also with the
figures of other participating firms the management of a firm gets an idea whether the profit
earned by the firm is adequate. If the profit is inadequate a comparison of other supplementary
ratios provides an insight into the weaknesses and enables the management to take appropriate
action for removing them. Similarly, the management of a firm objectively evaluates its own
performance in different areas of operation (e.g. sales, production) by comparing various
financial and cost ratios of the firm with those of other participating firms.

Thus, the purpose of inter-firm comparison is to provide a device which assists the management
of a firm in evaluating the performance and also in identifying the weaknesses and the strengths
so that appropriate actions can be taken to improve its performance.

Management ratios that may be used for inter-firm comparison

1. Return on Assets (%)= Operating Profit/operating Assets X 100

2. Profit margin to Sales(%)= Operating Profit/Sales X 100
 3. Turnover of assets (times per year)= Sales/ Assets
This ratio may be further analysed as under
(a) General asset utilization ratios (times per year)
(i) Sales per Fixed Assets .
This can be further analysed as under Fixed Asset utilization ratio (Sales per
rupee of the asset
(I)Sales/Building
(II) Sales/Plant and Machinery
(III) Sales/other Assets

(ii) Sales per Current Assets

This ratio can be further analysed as follows(Sales per rupee of the asset)
(I) Cost of Sales /Materials stock
(II) Cost of Sales/Work-in-progress
(III) Cost of Sales/Finished Goods
(IV) Cost of Sales/Debtors
4. Operating costs as a percentage of Sales
This can be further analysed into each operating cost as a % of Sales such as
(I) Production cost
(II) Administration cost
(III) Direct Material cost
(IV) Direct Labour cost
(V) Other production cost
5. Value added
(I) Per Rupee of sale
(II) Per Rupee of operating asset
(III) Per employee

Advantages of inter-firm comparison

1.Weakness are revealed and this leads to remedial action

2. The general trend of sales, profit or cost of production in the industry is revealed

3.It provides a stimulus for self -evaluation

4.The central organization selects and reports only the selected key ratios.This saves
management time and helps each firm to concentrate only on weak spots

5. Specialized knowledge and experience of the central organization are at the disposal of the
participating firms. Statistics, knowledge and experience possessed by the central organizationare
used for a correct interpretation of the results.

6. Participating firms provide data on a voluntary basis using standard definitions and therefore,
the data so provided are better comparable than figures in published annual accounts
 7.It provides signals of sickness of an individual firm and the industry in general. Thus it helps to
draw Government attention towards the impending sickness of the industry.

Limitations of inter-firm comparison

Ratios lose their significance if participating firms widely differ in size, method of production etc.
Under such situations ratios are likely to be misused as the ratios without understanding what they
reflect would lead to misleading results.