Introduction:
Uniform Costing is not a separate method or type of Costing. It is a technique of Costing and can be applied to any industry. Uniform Costing may be defined as the application and use of the same costing principles and procedures by different organisations under the same management or on a common understanding between members of an association. The main feature of uniform costing is that whatever be the method of costing used, it is applied uniformly in a number of concerns in the same industry, or even in different but similar industries. This enables cost and accounting data of the member undertakings to be compiled on a comparable basis so that useful and crucial decisions can be taken. The principles and methods adopted for the accumulation, analysis,
apportionment and allocation of costs vary so widely from concern to concern that comparison of costs is rendered difficult and unrealistic. Uniform Costing attempts to establish uniform methods so that comparison of performances in the various undertakings can be made to the common advantage of all the constituent units.
Scope of Uniform Costing:
Uniform Costing methods may be advantageously applied:
- In a single enterprise having a number of branches or units, each of which may be a separate manufacturing unit.
- In a number of concerns in the same industry bound together through a trade association or otherwise, and
- In industries which are similar in nature such as gas and electricity, various types of transport, and cotton, jute and woolen textiles.
The need for application of Uniform Costing System exists in a business, irrespective of the circumstances and conditions prevailing therein. In concerns which are members of a trade association, the procedure for Uniform Costing may be devised and controlled by the association or by any other central body specially formed for the purpose.
Requisites for Installation of a Uniform Costing System:
The organisational set up for implementing the principles and methods of Uniform Costing may take different forms.
It may range from a small association of a number of concerns who agree to have uniform information regarding a few specific cost accounting respects, to be a large organisation which has a fully developed scheme covering all the aspects of costing. The success of a uniform costing system will depend upon the following:
- There should be a spirit of mutual trust, co-operation and a policy of give and take amongst the participating
members. - There should be a free exchange of ideas and methods.
- The bigger units should be prepared to share with the smaller ones, improvements, achievements of efficiency,
benefits of research and know-how. - There should not be any hiding or withholding of information.
- There should be no rivalry or sense of jealousy amongst the members.
In the application of Uniform Costing, the fundamental requirement is, therefore, to locate such differences and to eliminate or overcome, as far as practicable, the causes giving rise to such differences. The basic reasons for the differences may be as follows:
(a) Size and organisational set up of the business:
The number and size of the departments, sections and services also vary from one concern to another according to their size and organisation. The difficulty in operating Uniform Cost Systems for concerns which vary widely in regard to size and type of business may to some extent be overcome by arranging the various units in a number of size or type ranges, and applying different uniform systems for each such type.
(b) Methods of production:
The use of different types of machines, plant and equipments, degree of mechanization, difference in materials mix and sequence and nature of operations and processes are mainly responsible for the difference in costs.
(c) Methods and principles of cost accounting applied:
It is in this sphere that the largest degree of difference arises. Undertakings manufacturing identical or similar products and having the same system of cost accounting would generally employ different methods of treatment of expenditure on buying, storage and issue of materials, pricing of stores issues, payment to workers, basis of classification and absorption of overhead, calculation of depreciation, charging rent on freehold or leasehold assets etc.
Fields covered by Uniform Costing:
There is no system of Uniform Costing which may be found to fit in all circumstances. The system to be installed should be tailored to meet the needs of each individual case. The essential points on which uniformity is normally required may be summarized as follows:
- Whether costs are required for the individual products i.e for the cost units or for cost centres.
- The method of costing to be applied.
- The technique employed such as Standard Costing, Marginal Costing.
- Items to be excluded from costs.
- The basis of departmentalization.
- The basis of allocation of costs to departments and/or service department costs to production departments.
- The methods of application administration, selling and distribution overhead to cost of sales.
- The method of valuation of work-in-progress.
- Methods of treating cost of spoilage, defective work, scrap and wastage.
- Methods of accounting of overtime pay bonus and other miscellaneous allowances paid to workers.
- Whether purchase, material handling and upkeep expenses are added to the cost of stores or are treated as overhead expenses.
- The system of materials control-pricing of issues and valuation of stock.
- The system of classification and coding of accounts.
- The method of recording accounting information.
Advantages of Uniform Costing:
Main advantages of a Uniform Costing System are summarised below:
- It provides comparative information to the members of the organisation / association which may by them to reduce or eliminate the evil effects of competition and unnecessary expenses arising from competition.
- It enables the industry to submit the statutory bodies reliable and accurate data which might be required to regulate pricing policy or for other purposes.
- It enables the member concerns to compare their own cost data with that of the others detect the weakness and to take corrective steps for improvement in efficiency.
- The benefits of research and development can be passed on the smaller members of the association lead to economy of the industry as a whole.
- It provides all valuable features of sound cost accounting such as valued and efficiency of the workers, machines, methods, etc., current reports of comparing major cost items with the predetermined standards, etc.
- It serves as a prerequisite to Cost Audit and inter firm comparison.
- Uniform Costing is a useful tool for management control. Performance of individual units can be measured against norms set for the industry as a whole.
- It avoids cut-throat completion by ensuring that competition among member units proceeds on healthy lines.
- The process of pricing policy becomes easier when Uniform Costing is adopted.
- By showing the one best way of doing things, Uniform Costing creates cost consciousness and provides the best system of cost control and cost presentation in the entire industry.
- Uniform costing simplifies the work of wage boards set up to fix minimum wages and fair wages for an industry.
Limitations of Uniform Costing:
- Uniform costing presumes the application of same principles and methods of Costing in each of the member firms. But individual units generally differ in respect of certain key factors and methods.
- For smaller units the cost of installation and operation of Uniform Costing System may be more than the benefits derived by them.
- Uniform costing may create conditions that are likely to develop monopolistic tendencies within the industry.
- Prices may be raised artificially and supplies curtailed.
- If complete agreement between the members is not forthcoming, the statistics presented cannot be relied upon. This weakens the Uniform Costing System and reduces its usefulness.
