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
