To meet the specific requirements of different industries, different types of costing principles and practices are used. But to compare the achievements, costs, targets, profitability etc. in the same concern or different units of the same organisation or different units of the same industry, it is essential that the same set of principles and practices are adopted by all these units.
Uniform costing refers to a system of costing under which several undertakings use the same costing principles or practices.
CIMA, London Terminology defines uniform costing as
“a common system using agreed concepts, principles and standard accounting practices adopted by different entities in the same industry to ensure that they all deal with accounting information in a like manner, the objective being to facilitate inter-firm comparison.”
It is neither a separate method of cost accounting like specific order costing or operation costing nor a separate technique of costing like marginal costing, standard costing but is only a particular system of costing which takes the help of both methods and techniques of costing.
The most important characteristic of uniform costing is that whatever may be the method of ascertaining cost, it is adopted uniformly in a number of undertakings in the same industry or even in different industries. This enables the member undertakings to compile the cost and accounting data on a comparable basis which ultimately may be useful and helpful to the management for taking crucial decisions.
Features of Uniform Costing:
- The same costing principles are applied by all member units for ascertaining cost.
- Cost statements and reports are prepared on a uniform basis.
- The accounting period is common for all member units.
- All the member units adapt the same costing methods, techniques and systems for collection, ascertainment and control of cost.
Scope of Uniform Costing
Amalgamation and closer working arrangements between groups of manufacturers in particular industries, and organisation for nationalization have necessitated, to a certain extent, the establishment of some degree of uniform costing by industries.
Uniform costing may be applied advantageously in an organisation having a number of branches, each of which may be a separate manufacturing unit or in a number of units in the same industry bound together through a trade association or otherwise, or industries which are similar like printing press, hotels, sugar, cement, plastic, jute, woolen textiles, cotton, gas, electricity, road transport undertakings of various states and have common operations and procedures or a firm having number of plants under same ownership and control.
Thus in some organisations the head office controls the operation of uniform costing but in other organisations the different units of the same industry may be bound together by a trade association for the purpose of uniform costing. This is adopted to render competition less destructive, by ensuring that all the members know what is included in cost and how to arrive at it.
This is also connected with a standardized method of collecting figures in order to fix selling prices or a basis acceptable to those engaged in the industry. Whatever might be the circumstances and conditions prevailing in any business, the need for application of uniform costing definitely exists there.
This is done in all the organisations with the objectives like comparison of costs, achieving reduction in cost and improvement in performance, fixing uniform prices, cutting or eliminating unfair trade practices etc.
Need for Uniform Costing
The need for uniform costing arises from the fact that different units use different cost procedures and principles for costing. Such differences arise because of the following points:
Size of Business:
The problems arising from the size of business may differ in different industries and units. The difference may be because of division of work, division of responsibility and level of expenditure.
In small concerns all the problems are handled by one person and there is no need of elaborate system of costing but in big business there is need of division of work and responsibility and the authority is given to the different levels of managers to complete their work efficiently.
Nature of Business:
The nature of businesses differs because of different manufacturing processes and the types of machines used. Some concerns use heavy machinery for carrying out their operations while others use labour intensive machines. Moreover, for similar operations different types of machines can be used.
When there is difference in products to be produced because of difference in the quality of finished product or raw materials or change in the material mix though the size, type and nature of the business is the same, the costing problems and procedures will also differ because of application of different methods and principles of cost accounting.
Thus, the need for uniform costing arises because of differences in size and organisation set up, wage structure, methods of production and degree of automation and application of different methods and principles of cost accounting.
Objectives of Uniform Costing
Fixation of Common Price:
It avoids cut throat competition among the member units by fixing a common price which is acceptable to all and thus helps in bringing stability of prices of products. Moreover, selling prices of the products are fixed on the basis of reliable data provided by member units using uniform costing. Prices fixed will be acceptable to all and will result in better and cordial relations between the member units.
Several common processes or operations can be standardized and made applicable to several undertakings. It will help in improving the performance of inefficient units.
It also enables the member units to use this system as yard-stick of their achievements and performances by comparing costs and profitability of such units. It helps that member units to exchange their ideas and problems and to equip them with current trends and technology.
Inter Unit Comparison of Cost of Production:
This is facilitated because a method of uniform costing is followed by several undertakings.
Control of Cost:
It facilitates in arriving at the cost of production for the industry as a whole which is acceptable to several undertakings in the industry. It also helps to control the cost by eliminating the unprofitable ventures and inefficiencies. There will be better exchange of information among the member units which ultimately leads to reduction in costs and improvement in the quality of the products.
Helpful for General Control Over Member Units:
It enables the trade associations to have a general control over the member units by way of regulating the production capacity, fixation of selling price and so on.
Helpful to the Government in Formulation of Policies and Giving Subsidies:
It provides cost structure to the government to enable it to formulate policies relating to wage structure, pricing, import and export and so on. It also furnishes information to the government to get subsidy and other concessions.
It also helps to determine standardization in the method of production and distribution.
Fields Covered by Uniform Costing System:
The system of uniform costing must be to meet the needs of each individual case as there is no system which may be applied in all circumstances. The purpose of this system will determine the extent of uniformity that should be achieved with respect to various aspects of cost accounting.
If the common price is to be fixed under this system, then member units may not be interested in achieving unity in other respects. This may be necessary if comparison of the performance of cost centres is to be made.
Uniformity may be required on the following points by the participating members:
- The method and technique of costing to be followed.
- Cost is to be ascertained from cost units or cost centres.
- Definitions of the various elements of costs.
- The basis for cost classification and codification.
- Treatment of purchases, material handling and upkeep expenses for the purpose of determining costs.
- The system of material control.
- The system of classification and codification of accounts.
- Methods of remunerating the workers.
- Methods of accounting of overtime pay, idle time, bonus and other miscellaneous allowances paid to the workers.
- The identification of production and service departments.
- The basis of allocation and apportionment and method of absorption of factory overheads, administration, selling and distribution overheads to the cost of sales.
- The method of valuation of stock and work-in-progress.
- The rates of depreciation to be used in case of fixed assets.
- Method of treatment of interest on capital and notional rent of owned buildings.
- Method of treating waste, scrap, spoilage and defectives costs in cost accounting.
- Treatment of research and development costs.
- The method of treating under a: id over absorption of overheads.
- The method of recording accounting information. Integral or non-integral system of costing to be followed.
- Items to be excluded from the costs.
- Reports and statements for planning and control.