Uniform Costing & Inter-firm comparison PDF

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Uniform Costing & Inter-firm comparison...

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Meaning of uniform costing: Uniform costing is neither a costing method like job costing or process costing nor it is a costing system like standard costing or historical costing but a particular system which may combine any of the costing methods and any one or more system of costing. It is the application and use of the same costing principles and procedures and techniques by several undertakings. It means and involves that different concerns should adopt a common method of costing and apply uniformly the principles and techniques, so as to enable them for better comparison. A uniform costing system is designed by the trade associations for the benefit of its members. A group of manufacturers lay down a set of uniform principles and procedures of costing to be adopted. The common method adopted by different similar industry will enable a better cost control and cost reduction.

Definition: It is defined as, “the use by several undertakings of the same costing principles and or practices.” Another definition says, “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.” Uniformity of application of principles; of apportionment and absorption of overheads; and of determining cost and selling prices are found to be advantageous for comparing efficiencies and as a means of controlling unit costs. Example: a number of sugar mills owned or managed by one group may adopt a uniform costing system or different companies engaged in sugar industry may through a common representative association agree to follow a uniform costing pattern. The working system in the former case will be simpler as compared to the latter

because in the latter case the units are not under the same management and therefore the arrangement is purely voluntary. Need for uniform costing: The need for uniform costing arises because the cost structures and procedures, practices and principles of costing differ from firm to firm; business to business and industry to industry. The reasons for such differences are as under:A. DIFFERENT SIZE OF BUSINESS: 1. Division of work differs: In a small concern, several jobs can be handled by one person, while in a large concern; one job can be completed by several persons. This leads to difference in costing problems. 2. Division/Responsibility differs: A large concern can afford to have many departments and hence there are line and staff positions and there is thus division of responsibility among them. In small concerns staff positions rarely exist, and the line managers have to perform all responsibilities. 3. Level of expenditure differs: A large concern can employ liberal methods of remuneration to workers, buy costly materials and incur heavy overheads while small concerns have several limitations in these respects B. DIFFERENCE IN NATURE OF BUSINESS: 1. Method s of manufacture differs: Some concerns are capital intensive requiring heavy machinery for carrying out the manufacturing operations while others are labour intensive the cost will therefore differ. 2. Types of machines differ: Different types of business require different types and size of machines. Moreover for carrying out similar operations, varying types of machines may be used. This results in adoption of different costing procedures.

C. PRODUCT DIFFERENTIATION: It may cause difference in cost and costing procedures:- 1. Quality of finished product differs: the type of business may be same but the product design and quality may differ to satisfy individual needs, tastes and circumstances. 2. Quality of raw material: Cost varies because alternative forms of raw material may be used by different firms. 3. Material mix may differ: When different types of materials are to be mixed for manufacturing a product, the proportion of the mixture may differ from concern to concern. 4. Method of remunerating labour may differ from concern to concern. Objectives of uniform costing: The technique of uniform costing may be introduced with one or more of the following objectives:1) To avoid competition: It eliminates cut throat competition by fixing common prices on the basis of uniform costing procedures. It thus, also aims at bringing stability in prices of the products. 2) Cost comparisons: It enables different firms to compare the cost because the cost are based on same principles. Thus their profitability can also be compared. 3) Measurement of efficiency: Comparison of cost and profitability helps in measurement of efficiency. Uniform costing enables the member participants to use this system as yardstick of their achievements and performances. 4) Reliable prices: The confidence is reposed in the public where the prices fixed are based on sound and uniform costing principles. This will result in better and cordial relations between members adopting this system and their customers.

5) Cost control: One of the objectives of uniform costing is an effective control over cost. Thus facilitates location of unprofitable ventures. Economies and inefficiencies are revealed at every stage. The uniform cost serves as the standard cost and helps in controlling the off standard performances. 6) Better exchange of information: Members having technical knowledge provide the benefit of their experiences to others. Free exchange of information leads to reduction in cost and improvement in the quality of product. Essential / Pre-Requisites for success of uniform costing system: It depends on the following:1) Co-operation and understanding: There should be mutual cooperation and understanding among the members who participate in the uniform costing scheme, otherwise the data for computation of cost and fixation of the selling price of the product under uniform costing will not be available. 2) Confidence and trust: There should be mutual confidence and trust. This is necessary for exchange of ideas and information among members. 3) Absence of rivalry and jealously: There should not be any inner rivalries. Complete harmony in ideas should be maintained. 4) Common terminology: Common terminology should be prepared by the participating units. It means they should agree for a common set of principles and or procedures 5) Free exchange of information: about 3 M ‟s- Men, Machines and Materials should unhesitatingly and freely pass between members so that comparisons can be made.

6) Common interest: All the members firms should have a common interest. It may be selling of goods at uniform prices or making inter-firm comparisons or controlling cost, etc. 7) Flexibility: The members should not have rigidity in their attitudes. Flexibility of approach is essential so that changes may be introduced whenever required. Advantages of uniform costing:

It has following merits in different sectors:-

1. FOR MEMBER UNITS: a. Fixation of selling prices: Accumulation of cost data on sound principles helps in determining Selling prices on a uniform basis to suit the requirements of the participating firms. b. Healthy competition: Removal of rivalries, enmities inculcates a spirit of healthy competition. c. Improvement in efficiency: Areas of inefficiencies are located and thus efforts for improving efficiencies can be made. d. Cost consciousness: The member firms realize the importance of controlling cost. This feeling of cost consciousness brings reduction in cost. e. Benefit to weaker units: Those participants, who do not have expert knowledge of products, can have it from others. Research and development division of large concerns provide useful information to small concerns

f. Management control: Cost comparison helps the management in knowing the points of their weakness and thus enables them to exercise better control over operations of the business. g. Profitability measurement: Unprofitable ventures are disclosed, the levels below which the firms shall operate at a cost 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 cost on a common basis. Thus, it economizes the cost of obtaining experts about cost. 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 organization are benefited 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 cost of all the firms. It helps in obtaining grant or subsidy, import-export license, etc. b. Better sales: Sales in 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 the trade association and government can expeditiously decide the policy matters regarding granting of subsidy, import license, etc. b. Minimum wages: On the basis of cost and profit data the „minimum ‟ and „fair ‟ wages can be fixed by the government through minimum wages act /wage board.

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 decisions in this regard. 4. FOR WORKERS: a. Better wages: Workers can be paid at better rates and bonus schemes may be introduced for common benefit of all. b. Better facilities: Recreational facilities or 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 consumers at cheaper rates. b. Confidence: Reasonable prices are charged from consumers. 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 pre-requisite for inter-firm comparison.

Limitations of uniform costing: The drawbacks can be summarized as follows: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 cost 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. 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 the size. 7. Distortion of cost: Cost computed under uniform costing may not be representative of all the concerns. Thus, the cost may be distorted and may not give a correct picture in specified areas. INTER-FIRM COMPARISON:

Meaning: Inter-firm comparison implies comparison of the results of the different firms so that efficiencies or in efficiencies may be located and profitability may be judged. Thus, inter-firm comparison is a yardstick of performance evaluation and cost benefit analysis. The accumulated data regarding cost, 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 a foundation stone over which inter-firm comparison is developed and applied in a wider field. OBJECTIVES OF INTER-FIRM COMPARISON: The objectives are inter-linked with each other:a. Improvement in efficiency: Each member-unit can and tries to improve its efficiency when on comparison with other member-firms it comes to know about its weak points. b. Effecting economy: Economy may be affected by locating and eliminating weaknesses and wastages. c. Maximizing profits: The adequacy of profit may be measured and action can be taken to improve profitability position. Pre-Requisites / Requirements of inter-firm comparison scheme: 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 the management and the purpose of the comparison. Though no standard list of such information required can be given, yet the following can be the general matters on which the information may be collected: a. Cost and cost structure. b. Labour / machine efficiency and labour / machine utilization. c. Consumption, wastage of raw-material, inventory levels d. Return on capital employed. e. Liquidity. f. Reserves and appropriation of profits. g. Accounts receivable and Accounts payable. h. Production methods and technical aspects. 2. Responsibility for collection: The person who would be responsible for collecting data should be pre-decided. Generally, if trade associations are formed, they are responsible for it. If there is holding company or parent organization, it has to do this job. 3. Methods of collection: 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 profitability, efficiency and productivity, etc. ADVANTAGES OF INTER-FIRM COMPARISON:

1. Stability: Inter-firm comparison removes 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 cost, 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 are located. 5. Proper reporting: Efficient reporting system is developed and information is presented in standardized forms. 6. Fair competition: Firms try to avoid unfair competitions. Harmonization and synchronization 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 supplying to the association and thus the recording system is improved.

LIMITATIONS OF INTER-FIRM COMPARISON: 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 cost. 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 co-operation of all the participants for submission of cost data in time and their co-ordination 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: a. Adequate education and propaganda through articles in journals, lectures, seminars and personal discussions. b. Installation of a system which ensures perfect secrecy. c. Introduction of a meaningful and scientific cost system....