Costing Systems

Costing systems is the foundation or basis where costing records and cost statements are anchored on. 

In Cost Accounting, there are mainly three such systems, namely;

Historical Costing System:

Historical costing system is a basis used in recording and preparing of costs and cost statements respectively using actual costs/expenses as paid or incurred during production of the product. This system is also referred to as actual costing system

In this case, the cost accountant records the cost of each cost element such as material, labor and overheads as it occurred or as per what was actually paid.

Example one

Mountain Climber co ltd manufacture a certain type of sports shoes to enable the athletes to comfortably perform. The actual cost paid for the shoes was as follows;                                   

                                     Amt. $

Raw materials              122

Labor                              25

Factory overhead           13

Total actual cost           160    

Standard Costing System

Standard costing system is a basis used in recording and preparing of costs and cost statements respectively using predetermined costs/expenses based on past experience during production of the product.

The aim of this kind of costing system is to allow the management to compare the estimated cost and actual cost incurred or paid at last so as to assess the performance of a cost Centre or organization.

In this case, the cost accountant records the cost of each cost element such as material, labor and overheads as predetermined.

 

Example two

Mountain Climber co ltd manufacture a certain type of sports shoes to enable the athletes to comfortably perform. The predetermined cost paid for the shoes was as follows;                                   

                                                      Predetermined Amt.$           Actual Amt.$     Deviation Amt.$          

Raw materials                                                 90                                    122                    (32)

Labor                                                               20                                      25                      (5)

Factory overhead                                            10                                      13                      (3)

Total cost                                                      120                                    160                       40

NB: In this system, the management will compare the two sets of data for decision-making purposes

Uniform Costing System

Uniform costing system is a basis used in recording and preparing of costs and cost statements respectively using uniform way or principle for all the departments or organizations. When we talk of uniform way, it may also refer to the same costing system applying across to be able to do inter comparison amongst departments and organizations probably from the same industry.  In this case, the cost accountant ensures that cost of each cost element such as material, labor and overheads are maintained in the same approach for all departments. If it concerns the industry, then the cost accountant of each organization ensures uniformity in cost element and cost statement preparation for comparison purposes.

Example three

Mountain climber has three departments, namely X, Y and Z which manufacture same type of shoes but for different target markets. The organization uses the standard costing system. Therefore, the cost statement prepared will appear as follows;

                                                                                             Predetermined

                                                                                             DEPARTMENT

                                                                        X                 Y                    Z

                                                                      Amt.$         Amt.$           Amt.$          

Raw materials                                                 90              100                122                  

Labor                                                               20                50                  25                    

Factory overhead                                            10                25                  13                     

Total cost                                                       120              175                160