Uniform Costing

Uniform costing is not a distinct method of cost accounting like marginal costing or ABC. It is one of the latest techniques of costing and cost control. It refers to acceptance and adherence of identical costing principles and procedures by all or many units in the same industry by mutual agreement.

In simple words it refers to the system which is uniformly followed by many companies of the same industry in order to benefit comparison and competition.

Contents

1. Introduction to Uniform Costing
2. Meaning of Uniform Costing
3. Definitions of Uniform Costing
4. Need of Uniform Costing
5. Objectives or Purposes of Uniform Costing
6. Objects of Uniform Costing
7. Situations Where Uniform Costing Can be Introduced
8. Extent of Uniformity
9. Requisites for Installation of Uniform Costing
10. Uniform Cost Plan
11. Reasons for Variations in Cost Structure
12. Requirements of Uniform Costing
13. Points to be Considered While Implementing Uniform Costing
14. Types of Undertaking Where Uniform Costing Can be Applied
15. Matters Where Uniformity is Required
16. Uniform Cost Manual
17. Difficulties Encountered before Introducing Uniform Costing
18. Uniform Cost Accounting
19. Inter-Firm Comparison
20. Advantages of Uniform Costing
21. Drawbacks of Uniform Costing
22. Limitations of Uniform Costing

Uniform Costing: Meaning, Objects, Requisites, Requirements, Uniform Cost Manual, Advantages, Limitations, Inter-Firm Comparison, Examples and Formula and More…

Uniform Costing – Introduction

Uniform costing is not a separate or distinct method of cost accounting like job costing or process costing. It is only a system of cost accounting to be used by the members of the industry or trade association. It involves adoption of the same costing principles, practices and procedures by the individual members of the industry for inter-firm comparison.

The system is made operative through Trade Association or Chamber of Commerce or some other central agency. Its underlying idea is that whatever costing methods are used, the same should be applied uniformly by all the members of the industry. Before a uniform costing system is applied, it is utmost necessary to educate the members about the desirability of this system and its underlying principles.

Uniform costing is not a new concept. It was first introduced by the National Association of Stove Manufacturers of U.S.A. which developed a uniform formula for use by its members for costing industry’s products. Similarly, a uniform costing system was adopted for printing industry in the United States. But in U.K., British Federation of Master Printers was the first organisation to introduce a uniform costing system.

In India, it is being used in coal industry, steel industry and fertiliser industry. There is a good scope of using uniform costing system in other industries too. CIMA defines uniform accounting as “a system, using common concepts, principles and standard ac­counting practice, adopted by different entities in the same industry to facilitate inter-firm comparison.”

Uniform Costing – Meaning

Uniform costing is not a distinct method of cost accounting like marginal costing or ABC. It is one of the latest techniques of costing and cost control. It refers to acceptance and adherence of identical costing principles and procedures by all or many units in the same industry by mutual agreement.

CIMA (London) defines “Uniform costing is the use by several undertakings of the same costing systems, i.e., the same basic costing methods and superimposed principles and techniques”.

As defined by Prof. Glover, “It is a system of uniform application of the principles of a costing method agreed upon and adopted by the whole or majority of the manufacturers or executives in any specific industry”.

In simple words it refers to the system which is uniformly followed by many companies of the same industry in order to benefit comparison and competition.

Uniform Costing – Definitions (With Examples)

When two or more industrial enterprises use the same Cost Accounting Principles and Practices, they (i.e., industrial enterprises) are said to be using Uniform Costing System. Uniform Costing, therefore, refers to the adoption and use of same Costing principles, practices and procedure by the member companies of an industry.

CIMA, England has, therefore, defined Uniform Costing as the use by several undertakings of the same costing principles and/or practices.

The Chamber of Commerce of the United States opined that, Uniform Cost Accounting comprises of a set of principles and, in some cases, of accounting methods which when incorporated in the accounting systems of the individual members in an industry will result in obtaining of cost figures by the individual members of the industry which will be on a comparable basis.

CIMA has also defined it on the same lines. Its definition reads as follows,…………….. a system, using common concepts, principles and standard accounting practice, adopted by different entities in the same industry to facilitate inter-firm comparison.

Uniform Costing is, therefore, not a separate method of Costing like Job Costing, Process Costing, Output Costing, Operating Costing, etc. It is only a system of Cost Accounting designed by the industry or by any central organization for use by its member-concerns. It aims at achieving uniformity with respect to Costing principles, practices and procedure.

A few examples illustrated below clarify this point:

1. If Straight Line Method is suggested by the central organization for computing the annual depreciation on buildings, and if this method is used by all the participating firms, then there is said to be a uniformity in the method of ascertaining the annual depreciation on buildings, and

2. If the Reducing Balance Method is used by all the participating firms to compute the annual depreciation on machines, then there is a uniformity in the method of ascertaining the amount of annual depreciation on machinery.

From the above, it is unequivocal that Uniform Costing denotes the adoption of identical Costing practices and procedure, for like transactions, by several undertakings in an industry.

Uniform Costing – Need

Introduction of cost accounting is not compulsory in the case of all types of concerns. Such of those concerns as are desirous of installing a suitable costing system do so. Since there is no stereotyped system of costing applicable to every type of undertaking, each undertaking designs a method suited to it.

Consequently, the methods of costing vary from concern to concern. In fact, even in the same type of concerns in an industry, the procedure adopted with regard to cost accumulation may be different.

In exceptional cases, however, two concerns may adopt the same costing method. They may also follow the same principles and procedures. But yet, as Dobson observes, the similarity may be “the result of accident and not of design.” In this context, Dobson gives the example of one concern adopting blanket rate of overhead absorption and another, departmental rates.

Consequently, the costs of the two concerns vary artificially and thus become incomparable. Such being the case, the costs of several undertakings within the same industry or of even different undertakings in similar industries cannot be compared.

Product costs of individual undertakings within an industry vary purely as a result of the costing methods and principles adopted. Cost differences may arise owing to different methods of valuing material issues. Wage differences may similarly arise by the methods of wage payment and incentive systems. Different methods of charging overhead and the rates of absorption may also cause cost differences.

Taking the cost basis of fixation of selling price, different cost structures of different undertakings for the same product will result in different prices. In such a situation, it is the competitive strength of a concern that enables it to continue in the long run. A situation of this kind is not desirable from the point of view of consumers, owners, creditors and the country as a whole.

It is, in this context, that the need for uniform costing arises. Uniform costing is aimed at standardising cost accounting methods and principles, by several undertakings following the same methods of costing, principles and procedures. Such standardisation results in cost comparison and fixation of selling price.

Uniform Costing – 8 Objectives or Purposes

The objectives or purposes of uniform costing are the following:

(i) To ensure that product prices are not arbitrarily fixed but on reliable cost data,

(ii) To provide reliable cost information to the Government and other regulatory bodies for fixation product prices,

(iii) To promote uniformity in costing methods and procedures for valid cost comparison between different units of an industry or the same organisation,

(iv) To enable each unit to measure its own efficiency in terms of the industry’s standard and eliminates inefficiencies,

(v) To serve as a basis of competitive but not destructive bidding,

(vi) To effect improvement in labour and machine performance, production methods and techniques,

(vii) To facilitate trade associations to regulate production capacity and formulate pricing policy,

(viii) To serve as a basis for Government subsidies or grants which need similar costing systems to ensure equitable distribution.

Uniform Costing – Top 10 Objects

1. Comparison helps to bring uniformity in the production cost of different units of the same industry.

2. Fixation of a common sale price is very important.

3. Better and standardised systems are available for the undertakings.

4. Inter-firm comparison facilitates further cost control and cost reduction.

5. Elimination of unhealthy competition among different units is a good improvement.

6. Exchange of ideas and technological knowledge among the members is encouraged.

7. Comparison of cost production will facilitate the improvement of production capacity and labour efficiency.

8. Determination of a common policy for the units is possible.

9. The stability in demand for the products is maintained.

10. This system ensures reasonable price to customers and profit to producers.

2 Major Situations Where Uniform Costing Can be Introduced

Uniform costing may be introduced in the following two situations:

(a) Where a number of units producing the same type of article or rendering the same type of service are under the same management; and

(b) Where different firms are members of a trade association.

In an amalgamation or any other form of combination, a number of concerns may be held together under the same management. These concerns may be engaged in the production and sale of similar or same product under different brands. In such a case, there is the need for comparing costs and performances of these units.

However, where the products produced are not identical, cost comparison may not become necessary. But yet, the adoption of uniform costing does facilitate comparison of costs of operating similar processes or machines employed in different units.

Undertakings which produce the same type of article or similar products may have formed themselves into a trade association. They may, in a large number of cases, be members of a trade association. Such an association may have, as one of its objects, regulation of production or fixation of product price.

If the trade association has to perform this function, it becomes necessary for it to compare the costs of its member units. In the absence of such a comparison, the high cost and low cost producer-members are considerably affected since the price fixed by the association does not reflect the true costs. Fixation of uniform prices does, therefore, necessitate computation of costs on a uniform basis.

Uniform Costing – Extent of Uniformity

1. Since there is no information about how the direct material cost and direct labour cost have been ascertained, it is not possible to comment on the uniformity with respect to these two elements.

Because, in the absence of information about the method used to price the material issues, treatment of material loss, idle time cost, overtime premium, etc., it is very difficult to say that the companies have adopted Uniform Costing practices and procedure with respect to these two major elements,

2. There is no uniformity in the method used to absorb production overhead expenses as the companies used different bases for absorbing the same. Because, ABC company used direct wages, MNQ the prime cost and XYZ the sales revenue as the base for the recovery of production overhead expenses, and

3. As far as operating expenses (viz., administrative, and selling and distribution overhead expenses) are concerned, there is a uniformity in the recovery of these expenses as all the three companies absorbed these expenses as a percentage of sales revenue.

Requisites for Installation of Uniform Costing

1. There should be mutual trust, cooperation and confidence among the participants, i.e., member units.

2. Bigger units must help smaller units by sharing their knowledge of achievements, improvements, experiences etc.

3. Sense of competition should not prevail among the member units.

4. Member units should brush off the differences and bring commonness of costing system.

5. Uniform costing plan and a uniform cost manual, in which cost accounting plans are laid down should be adopted. It is similar to budget manual. It serves as a guide to the participants in order to bring uniformity in costing system, principles, procedures etc.

6. Uniformity may be achieved in the following points-

(а) Method of cost, whether process or job cost to be adopted,

(b) The techniques, whether marginal, standard costing etc., to be employed,

(c) Uniformity in cost unit, for comparison,

(d) Uniformity in cost unit or cost center to which costs are calculated and analysed,

(e) Uniformity in various elements of cost,

(f) Items to be included or excluded from costs,

(g) Depreciation rate of fixed assets to be applied,

(h) Method of treatment on interest on capital, notional rent etc.

(i) Basis of distribution of service department to production departments.

(j) Treatment of defective work, spoilage, waste, scrap, over-time, fringe benefit etc.,

(k) The system of material control,

(l) Uniformity with regard to under- or over-absorbed overheads,

(m) Method of valuation of work-in-progress and stock,

(n) Method of remuneration to labour,

(o) System of accounting, whether integral or non-integral,

(p) Treatment of research and development cost.

Uniform Cost Plan (With Activities)

The term ‘Uniform Cost Plan’ covers activities such as cost accounting system, format for reports, analysis of cost data, etc.

Some of the activities which may be carried on partially or completely are as follows:

1. Publication of pages, speeches or discussions of important matters pertaining to costs in Trade Journals.

2. Publication of educational literature pertaining to objectives of cost finding.

3. Studies of particular costing problems in the industry to develop sound principles.

4. Activities of counselling nature relating to establishment or operatives of cost ac­counting system.

5. Development of estimating formulae or short-cut methods of establishing basis for pricing.

6. Development and promotion of uniform cost programme.

7. Cost studies in determining average or representative cost of products, functions or activities for general information of members.

8. Regular collection and dissemination of cost data under some kind of reporting plan.

9. Complete analysis of cost data to interpret results to show trends, weakness of operation, etc.

Uniform Costing – 6 Main Reasons for Variations in Cost Structure

Wide variations in the cost structure of products manufactured in different-factories render application of uniform costing system a difficult exercise.

Main reasons for variations in costs are indicated below:

Reason # 1. Difference in Size:

A large scale company employs staff and managers at a fat salary. The managers look after their specialised functions only. However, in a small-scale company, Managing Director or Manager may look after sales, purchases as well as production functions. As such the overheads would be comparatively lower in a small-scale undertaking.

Reason # 2. Difference due to Wage Structure:

Wage structures of the two companies may differ. For example, an attendant in a multinational company is getting about Rs.2500 p.m. whereas the salary of an attendant in an Indian company is only Rs.500 assuming produc­tivity achieved in both the cases is same. The divergencies in pay structure would result in wide variation in employees’ cost and overheads.

Reason # 3. Difference in the Plant Size:

In a large sized plant, operating at optimum capacity; conversion costs will be least whereas in a plant with a lower capacity, the conversion cost will be high, this results in the wide deviation m cost profile in these cases.

Reason # 4. Difference in Degree of Mechanisation:

In a less modernised plant, labour will be predominant while in a most modernised plant, depreciation will be nigh- The degree of mechanisation will affect the cost structure.

Reason # 5. Difference in the Method of Production:

When a product can be manufactured by employing more than one method, the cost of manufacture will definitely vary. For example, Ampicillin can be produced from intermediate state i.e., 6-APA or from basic stage, i.e., Pencillin G first crystal. In both the cases cost of production will vary considerably.

Reason # 6. Difference in Costing Principles and Procedures:

The costing principles and proce­dures employed by different units may differ. As much there will be difference in costs.

Requirements of Good Uniform Costing System

1. Whether cost data are required for one product or all the products produced in a factory.

2. Costing techniques to be used, i.e., historical, standard or marginal.

3. Definitions of various elements of costs such as –

(a) direct material;

(b) direct labour;

(c) cost of direct services

(d) factory overheads; administrative overheads and selling overheads.

4. Items which are extraneous to costs such as bad debts, donations, etc., and to be excluded from cost.

5. Production centres, cost centres, etc., to be used for analysis and comparison of costs.

6. Classification of production and service departments.

7. Methods to be used for by-product and joint product pricing and their treatment in cost accounts.

8. Method of treatment of spoilage, defectives, etc., in costs.

9. Treatment of research and development in costs and methods of allocation of research and development to each cost centre/cost unit.

10. Treatment of handling and storage costs of raw materials.

11. Method of pricing of materials used such as FIFO, LIFO, Simple average, weighted average, etc.

12. Methods of payment of remuneration.

13. Treatment of items like interest on own capital, rent of premises owned, etc.

14. Method of working out depreciation, i.e., whether straight-line method or written down value method to be used.

15. The method of apportionment of service departments costs to production departments.

16. Treatment of under/over-absorbed overhead, e.g., applying supplementary rate or write off to profit and loss account.

17. System of classification and codification of cost accounts.

18. Method of valuation of work-in-progress.

19. The method of presentation of data and reporting to management.

20. Any other data which may be necessary in a particular case.

10 Points to be Considered While Implementing Uniform Costing

Before adopting the uniform costing, it is important that a careful study of all relevant factors in different units must be made to ensure that the various operations are comparable. The objectives of uniform costing must be conveyed by the Trade Association to its members in clear terms. A standard procedure for analysing costs must be laid down.

In addition, the following points must also be looked into:

1. The costing method to be followed (e.g., process costing, unit costing or job costing etc.).

2. The costing technique to be followed (e.g., marginal costing, standard costing etc.).

3. The unit of cost for the purpose of ascertainment and control of costs (e.g., kg., lb., ton, etc.).

4. The definition of different elements of cost (e.g., direct material, direct labour, chargeable expenses, overheads etc.).

5. The production centres, cost centres to be used for analysis and comparison of costs.

6. The classification of production as well as service departments.

7. Treatment of defective work, spoilage, waste, scrap, overtime wages, fringe benefits etc.

8. Treatment of research and development costs.

9. Uniformity in respect of pricing material issues, payment of remuneration, treatment of controversial items (e.g., interest on capital, rent on own buildings etc.), method of calculating depreciation, method of apportioning service department costs, the bases for apportioning overheads to production departments, treatment of under or over recovered overheads, method of valuing work in progress and finished goods, the length of costing period, the method of accounts code to be adopted to ensure secrecy etc.

10. Finally, the method of presentation of data and reporting to management.

Types of Undertaking Where Uniform Costing Can be Applied

Uniform costing can be applied in the following types of undertaking:

1. Manufacturing identical products –

Those undertakings which manufacture identical products can use uniform costing system. The nature of the business is the same, therefore it does not present much of difficulty.

2. Carrying similar operations –

Where different industries carry out similar type of service or facility, uniform costing may be applied. For example, service industries like rail or road transport; gas or electricity companies etc. may adopt such a system.

3. Members of the same trade association –

A number of concerns engaged in the same industry (may not be manufacturing goods of identical type) bound together through a trade association or otherwise may like to have a uniform costing pattern so as to enable them in having a study of the cost pyramid and getting fixed reasonable prices for their products.

Matters Where Uniformity is Required

There is no system of uniform costing which can be suitable in all circumstances. The degree of uniformity regarding various cost accounting aspects will depend upon the purpose with which uniform costing is introduced.

However, uniformity will be required generally about the following matters:

1. Method of costing – Whether job or process or unit costing is to be employed, uniformity should be achieved in this regard.

2. Technique of costing – Whether standard or marginal or absorption costing technique is to be adopted, should be determined in common.

3. Pricing of materials – Materials issued to production are to be priced according to FIFO, LIFO or Average or any/other method, should be standardised.

4. Remunerating labour – Payment of wages will be according to time rate or piece rate and whether any incentive scheme will be in operation or not. In the event of such a scheme, a common plan should be introduced in all the concerns as far as possible.

5. Apportioning overheads – Overheads are to be apportioned to different departments. Common bases for apportionment should be used.

6. Absorbing overheads – Absorption of factory, office or selling overheads on a common pattern is essential. If one firm is charging factory overhead based on a percentage of direct materials, while other on direct labour, the third on prime cost, it would render comparisons of cost false or

useless.

7. Collection and classification of overheads – The overheads are to be collected and classified. The method should be uniform so that confusions are not created.

8. Charging of service departments’ overheads – The apportionment of overheads of service departments further to producing departments, also creates problems. Uniformity in method

should be tried to be obtained in this regard.

9. Division of costs – Costs are to be divided into different elements. Such division should be common.

10. Standard terminology – The costing concepts should be defined clearly. There should not be any misconception regarding the meaning of terms commonly used.

11. Classification of accounts – Materials, labour and expenses are to be classified as direct and indirect. The accounting treatment should be similar.

12. Codification of accounts – Common code numbers can be assigned in different firms for similar items. It makes the data accumulation work easier.

13. Items to be excluded – Items to be included in cost accounts and items to be excluded therefrom should be specified in beginning and there should be uniformity in treatment of such items.

14. Treatment of overhead items –

Following are some of the items of overheads (as given below) which need special treatment under uniform costing –

(a) Depreciation – Which method of depreciation is to be used? What shall be the rate of depreciation?

(b) Interest on capital – Whether it is to be treated as a part of cost? Whether interest is to be charged on owned and/or borrowed funds?

(c) Research and development costs – Whether such costs are to be included and if at all on what basis?

(d) Losses, wastages and scrap – How such costs are to be calculated and treated?

(e) Idle time and overtime – How such costs are to be computed and accounted for in the costing books?

(f) Rent charge – Whether national rent is to be charged for owned building?

15. Classification into fixed and variable overheads – The overheads are to be classified according to the nature of their variability. The basis for apportioning semi-variable overheads should also be common for all the member-units.

16. Cost control – Material, labour and overhead costs are to be controlled. The method of accounting should be common so that control can be exercised on a uniform basis.

17. Presentation of information and reporting – The form of statements and reports should be standardised so that management can compare the results of different organisations.

18. Other matters – Miscellaneous matters e.g., treatment of by-products, provision for services etc., should be settled. In individual circumstances it may be necessary to consider such aspects.

Uniform Cost Manual (With Information)

In order to implement the system of uniform costing successfully it is necessary to have a Uniform Cost Manual.

The manual is nothing but a booklet containing detailed instructions to be followed by different firms in an industry, adopting uniform costing, with regard to cost determination and cost control. It explains the nature and scope of the plan to be adopted and lays down the procedure for implementing it. It guides the member firms to operate their accounts on a uniform basis.

A typical uniform cost manual contains the following information:

1. Introduction:

i. Statement of objectives and purposes of the cost plan.

ii. Educating the management and people about uniform costing.

iii. Scope of the system

2. Organisation:

i. Organisation for developing and operating uniform costing.

ii. Stages in which the system has to be introduced.

iii. Management of the organisation by Trade Association.

3. Accounting System:

i. Principles of accounting to be followed.

ii. Terminology to be followed.

iii. Details of coding system.

iv. Classification and description of accounts.

v. Reconciliation between financial accounts and cost accounts.

vi. Accounting period of the cost plan.

4. Method of Costing:

i. Unit of production.

ii. Costing periods (e.g., monthly, quarterly, half-yearly or annual).

iii. Expenses to be consider

iv. Methods to be used for inter-unit transfer pricing.

v. Classification of departments (Production department, service department, etc.).

vi. Material cost—direct and indirect, treatment of losses, scrap, spoilage, pricing of materials, stock valuation.

vii. Labour cost—direct and indirect, treatment of idle time, treatment of fringe benefits, overtime, production bonus.

viii. Overhead—classification, collection, apportionment and allocation. Method of depreciation to be used, research and development expenditure, Method of allocation, apportionment of service dept. costs to production departments.

5. Reporting:

i. Periodicity of reports.

ii. Levels for whom the reports have to be sent.

iii. Cost statements.

iv. Ratios—cost as well as financial.

v. Other data.

Difficulties Encountered before Introducing Uniform Costing

Introduction of uniform costing is not as easy as it appears to be. The various participating units being heterogeneous varying in size due to differing capital and cost structures, the following difficulties have to be encountered before introducing uniform costing-

(i) Difference in Size:

The different units desirous of introducing uniform costing are not of the same size. Even if they are managed by the same body of managerial personnel, they differ in their capital structure, methods, machinery and processes of production. A large unit will have the economies of scale, specially purchases, and division of work, finance and marketing.

Some of these advantages of large-scale production may not be available to a small unit. Consequently, a small unit may find it difficult to standardise its accounting methods, principles and procedure.

Owing to the expensive nature of uniform costing, a small firm may prefer to continue to function in its own sphere without casting its lot with bigger units and thereby enjoy the benefits of uniform costing.

(ii) Difference in Location:

Geographical location has its impact on the cost structures of individual concerns. For instance, availability of materials at low prices close to areas where they are grown, availability of labour in thickly populated areas, electricity at low rates in industrial estates, wide market for the products, subsidy by some States and such other facilities result in reduced cost.

If these facilities are not available to other firms, their costs will be relatively higher. These differing cost structures may also be a sort of bottleneck to the introduction of uniform costing.

(iii) Difference in Principles and Procedure:

Not all business units follow the same principles and procedure with regard to cost accounting. Some may value material issues at the average rate, some on FIFO basis, while other LIFO basis. To some depreciation may be an item of variable cost while to others, it may be fixed cost.

Some may refer a blanket rate of overhead absorption, while others, departmental rates. This differing treatment of some items in cost accounting by the participating units is also one of the impediments in the way of introducing uniform costing.

(iv) Difference in Product Range:

Many concerns are multi-product in nature. There are only a few undertakings which restrict themselves to the production of two or three articles. Those that produce a large variety of articles within their capacity have the advantage of fixed cost spread over the whole range.

Consequently, the impact of fixed overhead on each variety becomes less. Such concerns will be able to have a low cost structure for each variety in contrast with others producing only a few varieties.

Uniform Cost Accounting (With Advantages and Methods)

The term ‘uniform cost accounting’, as distinct from ‘uniform costing’ conveys two meanings as under:

(i) The use by several undertakings of the same system of accounting for costs i.e., cost accounting which is uniform.

(ii) The use by several undertakings of the same forms, reports and statements etc. for presentation of costs under uniform costing scheme, i.e., accounting for uniform costs. The two aspects have been discussed here one by one.

Cost Accounting which is Uniform:

In such an event there will be uniformity regarding the following matters:

1. Forms –

The number of forms kept are less. Economy can be effected in printing costs. Moreover less capital and space is needed for stocking forms. Training of staff also becomes easier. Filling and handling methods can be standardised. Transfer of staff department wise or on an inter-firm basis also becomes easier. Comparison also becomes easy when same forms are used by all.

2. Organisational set-up –

Salary scales can be uniform. Training of staff and their transfer is also facilitated. However uniformity in this regard is difficult to achieve because of differences in the size of organizations.

3. Office equipments –

It also helps in training and transfer of staff.

4. Operations –

The daily operations can be performed on a uniform basis when forms, organisation and equipments are identical. It helps in internal check and cost audit also.

5. Classification of materials –

Materials can be classified on a common basis provided the product diversification is less and manufacturing process is not different. It facilitates comparison in costs, records can be standardised and thus material costing, cost accounting and cost control can be effectively done.

6. Classification for wages –

Accounting for direct and indirect wages is made easier when classification is common. Ascertainment of labour costs and then controlling the labour costs are facilitated.

7. Classification for expenses –

Direct expenses are treated as part of prime cost. There is uniformity regarding classification of other expenses also.

8. Cost centres –

Whether costs centres are personal or impersonal, productive or unproductive, product or process, common classification at all levels is essential.

9. Cost units –

Identical units can be there only when the industry is the same cost. Unit should be defined on a uniform basis.

10. Classification according to variability –

Fixed and variable expenses should be classified on uniform basis.

11. Classification according to controllability –

Controllable and uncontrollable costs should be divided on a uniform pattern.

12. Classification according to function –

Factory, office, selling and distribution overheads should be uniformly classified.

13. Coding system –

Code numbers should be assigned on a uniform basis.

14. Accounting classification –

Revenue and capital items should be properly defined and accounted for.

Advantages:

The advantages are being summarised as follows:

1. Preparation of consolidated statement – All the firms can present their results to the association and the association can prepare consolidated statements without delay.

2. Cost comparison – Uniform cost accounting data can easily be compared.

3. Easy transfer of staff – Staff may be transferred, lent or borrowed easily.

4. Easy training of staff – Staff at upper as well as lower levels can easily be trained in common routines.

5. Easy transfer of equipments – Office equipments can also be transferred easily from one firm to another if required.

6. Salary scales – Salary scales can be standardised.

7. Standardisation of routines – Office routines regarding filing etc., are standardised.

8. Reduction in costs – Printing costs can be reduced.

9. Saving in capital – Investment of capital in fixed assets is reduced on account of easy inter-transfer of equipments and other facilities among member-firms.

Accounting for Uniform Costs:

It means the manner in which uniform costs can be accounted or recorded.

Any of the following methods can be used to record uniform costs:

1. Historical costing –

Records of costs of products manufactured by different firms can be kept by the trade associations on a historical costing basis. Summaries can be prepared periodically and presented to all the members for cost comparisons etc.

2. Standard costing –

Uniform costs can also be computed by the member-firms by adoption of standard costing system. In such a case the costs will be carefully predetermined. The actual results then can easily be compared with the standards adopted by the concerns. The variances can be found out for cost control purposes.

Uniform Costing – Inter-Firm Comparison: Meaning, Objectives, Requisites, Advantages and Limitations

Inter-Firm Comparison:

Inter-firm comparison implies comparison of the results of different firms inter se so that efficiencies or inefficiencies are located and profitability may be judged. Thus, inter-firm comparison is a yardstick of performance evaluation and cost-benefit analysis.

The accumulated data regarding costs, prices, profits etc. of different concerns are put in the form of consolidated statements and are made available to all the member- units so that they can make a comparative assessment of their achievements and weaknesses with those of others.

Such a type of comparison is possible only when uniform costing is applied by all the concerns. Thus, uniform costing is the foundation stone over which inter-firm comparison is developed and applied in a wider field.

Objectives of Inter-Firm Comparison:

Following are the objectives of inter-firm comparison. The objectives are inter-linked with each other.

1. Improvement in efficiency – Each member-unit can try to improve its efficiency when on comparison with other member-firms it comes to know about its weak points.

2. Effecting economy – The weaknesses or ineconomies are located and economy may be effected by eliminating them.

3. Maximising profits – The adequacy of profits may be measured and action can be taken to improve profitability position.

Essential Requisites of Inter-Firm Comparison System:

The success of an inter-firm comparison scheme depends on the successful operation of uniform costing system. If uniformity cannot be brought about in costing principles and procedures, the comparison would be farce and futile.

However, the following additional points should be kept in mind while implementing the scheme of inter-firm comparison:

1. Information Needed:

The type of information and the extent to which information is required to be collected for inter-firm comparison has to be determined. As a matter of fact much depends on the needs of management and the purpose of comparison.

Though no standard list of such information required can be given, the following can be the general matters on which the information may be collected:

(i) Costs and cost structure.

(ii) Consumption and wastage of raw materials.

(iii) Machine efficiency and machine utilisation.

(iv) Labour efficiency and labour utilisation.

(v) Inventory levels

(vi) Capital employed and Return on capital employed.

(vii) Liquidity of the organisation.

(viii) Reserves and appropriations of profits.

(ix) Accounts receivable and accounts payable.

(x) Production methods and technical aspects.

2. Centre for Inter-Firm Comparison:

A central body should be created to collect and analyse data received from members of the scheme of inter-firm comparison.

It will perform the following functions:

(i) Data collection from member units;

(ii) Dissemination of results of study to them;

(iii) Undertaking activities of research and development for the benefit of member units, individually and collectively;

(iv) Organisation of training programmes; and

(v) Publication of relevant information through magazines or newsletters etc., so that Information becomes known to all concerned immediately.

3. Membership:

The firms should seek membership of the above central body, otherwise the very purpose of its setting up shall be defeated. The centre can make inter-firm comparisons also, only when firms participate. It does not matter whether firms are of different sizes.

But the mutual responsibility—responsibility of providing information on the part of member unit on one hand and responsibility of carrying out the above-mentioned tasks entrusted to the Apex Body (as listed under point no. 2) on the other, must be fulfilled for the success of the system.

4. Method of Collection and Presentation of Information:

The time by which and the form in which the information has to be submitted by the member units are required to be determined. The various statistical techniques can be used for collection of data, its editing, classification, presentation, drawing conclusions and making interpretations. Ratio analysis may be adopted for measuring profitability, efficiency and productivity etc.

The various important management ratios used for inter-firm comparison can be put in the form of the “Pyramid structure”.

The task of collection of information is performed by the centre at regular intervals in the manner prescribed. A questionnaire can also be mailed and information desired may be filled in by the respondents which after receipt of the duly filled-in questionnaire back from the firms, may be properly classified and tabulated.

These are the days of Information Technology and computers can also be used for analytical purposes the information called for at the initial stage may be asked in such a manner so as to be capable of analysis through computers. Reports can then be prepared and sent even to non-members.

Advantages:

1. Stability – Inter-firm comparison removes disparities and brings stability in the cost structure and presentation of information.

2. Cost consciousness – Cost consciousness is created among the participating firms and they are cautious at every level.

3. Cost control – Inter-firm comparison helps management to control the costs; efforts are made to reduce them if they exceed in the firm in comparison to the other firms.

4. Productivity – Productivity is improved when the spheres of weaknesses or uneconomies are located.

5. Proper reporting – Efficient reporting system is developed and information is presented in standardised forms.

6. Fair competition – Firms try to avoid unfair competition. Harmonisation and synchronisation of activities take place.

7. Regulation of prices – The Government can regulate prices by obtaining data about different firms.

8. Up-to-date information – The concern has to keep up-to-date information about the results for providing it to the association and thus the recording system is improved.

Limitations:

1. Misleading conclusions – If the data are not properly collected the results arrived at would be misleading. Decisions cannot be based on such conclusions.

2. Unreliable information – Information supplied by members may not be reliable. They may feel hesitant in disclosing the correct information about costs.

3. Unscientific system – In case the cost accounting system adopted by a concern is not suitable and adequate, the costing data supplied shall not be reliable.

4. Improper handling – The association which manages the comparison scheme should have qualities of effective leadership without which the scheme cannot be a success.

5. Timely-co-operation and co-ordination – The cooperation of all the participants for submission of cost data and their coordination is a must, otherwise the inter-firm comparison scheme cannot be implemented with effective results.

The above limitations can be overcome to a great extent by the following measures:

(i) Adequate education and propaganda through articles in journals, lectures, seminars and personal discussions.

(ii) Installation of a system which ensures perfect secrecy.

(iii) Introduction of a meaningful and scientific cost system.

Uniform Costing Advantages to Different Sectors – For Members Units, Parent Organisation, Government, Workers, Consumers and General  

The use of uniform costing provides the following advantages to different sectors:

1. For Members Units:

(a) Fixation of selling prices – Accumulation of cost data on sound principles helps in determining selling on a uniform basis to suit the requirements of all the participating firms.

(b) Healthy competition – Removal of rivalries and enmity inculcates a spirit of healthy competition.

(c) Improvement in efficiency – Areas of inefficiencies or uneconomies are located out and thus efforts for improving efficiency can be made.

(d) Cost consciousness – The member-firms realise the importance of controlling costs. This feeling of cost consciousness brings reduction in costs.

(e) Benefit to weaker units – Those participants who do not have expert knowledge of products can gain it from others. Research and development division of large concerns provides useful information to small concerns.

(f) Management control – Cost comparison helps the management in knowing the points of their weaknesses and thus enables them to exercise better control over the operations of the business.

(g) Profitability measurement – Unprofitable ventures are disclosed, the levels below which the firm shall operate at a loss are known. Thus, uniform costing serves as an insurer of profits.

(h) Economy – The concerns can appoint a cost expert or consultant jointly and share such costs on a common basis. Thus, it economises the cost of obtaining expert’s advice about costs.

2. For Parent Organisation:

If the member units are under a common control either through a holding company or through a trade association, the member units as well as the parent organisation are benefitted by uniform costing in the following manner.

(a) Representation easy – The association can present the problems of member-firms to the Government in a better way when it has with it the data about costs of all the firms. It helps in obtaining grant or subsidy, import-export licence etc.

(b) Better sales – Sales in the home and foreign market can be promoted by making a joint effort at the association level.

3. For Government:

(a) Data availability – Costing data can easily be available to the Government through trade associations and the Government can expeditiously decide the policy matters regarding grant of subsidy, import licence etc.

(b) Minimum wage – On the basis of cost and profit data, the ‘minimum’ and ‘fair’ wages can be fixed by the Government through Minimum Wages Act or Wage Boards.

(c) Effective price control – The Government can regulate prices and check the genuineness of the uniform prices fixed by the association. It can also implement control system, if necessary.

(d) Comparative assessment – The Government can compare the relative efficiency or otherwise of private and public sectors and take important policy decision in this regard.

4. For Workers:

(a) Better wage – Workers can be paid at better rates and bonus schemes may be introduced for common benefit of all.

(b) Better facilities – Fringe or non-monetary benefits can be arranged in a better way on a common basis.

(c) Stability – Labour turnover is reduced due to more uniformity in rewarding workers by member- firms. This brings stability in workers, which improves their earnings as well as the earnings of the concern.

5. For Consumers:

(a) Better goods – Better quality goods are available to customers at cheaper rates.

(b) Confidence – Reasonable prices are charged from customers. This brings a feeling of confidence in customers regarding member-firms.

6. General:

(a) Helps in cost audit – Auditing of cost accounts is facilitated by maintenance of uniform records.

(b) Inter-firm comparison – The results of one firm can be compared with that of the other and thus it serves as a prerequisite for inter-firm comparison.

Uniform Costing – 7 Major Drawbacks

The system has several advantages, but it is also not free from certain drawbacks.

These can be summarised as under:

1. Common principles and procedures –

Uniform costing requires laying down of uniform principles and procedures. Since the individual circumstances of each concern varies to a great extent, bringing uniformity in procedures, practices, etc. poses serious problems.

2. Lack of trust and confidence –

The member units particularly when independently managed, may not have the feeling of mutual trust and confidence. Thus, the system may not operate successfully.

3. Non-disclosure of technical or cost information –

The member-concerns usually do not provide total information regarding costs and technical procedures. Thus, the system may not prove to be a success.

4. Rigidity –

Flexibility of approach is difficult to be maintained. The common prices fixed may not meet the requirements of all and sundry.

5. Monopoly –

Member-units may fix up monopoly prices and thus exploit the consumers. Thus, in a bid to avoid cut-throat competition, cut-throat prices from the point of view of consumers may be charged.

6. High cost –

A comparatively small concern may find the system expensive since the system to be adopted by all member-units has to be uniform irrespective of their size.

7. Distortion of costs –

Costs computed under uniform costing system may not be representative of all concerns. Thus, the costs may be distorted and may not give a correct picture in specified cases.

Uniform Costing – Limitations

Uniform costing technique has the following limitations:

(i) This technique assumes that all the undertakings in the industry are identical, which is not possible.

(ii) Uniform costing system requires the adoption of a common basis of allocation and apportionment of costs. It is very difficult to find out a common basis of allocation and apportionment of costs.

(iii) Uniform costing involves the mutual exchange of information among member units. Sometimes, the member units may not provide secret information and data to the common pool. Thus, mutual trust among member units may be missing after some time.

(iv) The installation of uniform costing system is quite expensive and the medium and small sized units are not in a position to adopt it.

(v) Uniform costing encourages monopolistic trend in the industry. Monopolistic trends have their own economic and social evils.