CA Final, Paper 5, Advanced Management Accounting, Chapter 8

CA. Anurag Singal, B.Com(H), ACA.

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Understand the concept of Uniform Costing

Know about Objectives of Uniform Costing

Understand the concept of Inter firm Comparison

Know about the requisites of Inter firm Comparison

1 • Uniform costing is not a separate method of costing.

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• Uniform costing implies the use by several undertakings of the same costing systems, i. e., the same basic costing methods, principles and techniques.

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• Uniform costing is a pre-condition for successful inter-firm comparison. It can be ensured in two circumstances: • A particular undertaking controls a number of firms. • A number of firms are the members of a trade association or

industry.

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• Where the products manufactured are identical, there is a need for comparing the cost of these products as produced by different units within an undertaking.

• When the products produced by different units are not identical, comparison of cost of operation can be made if identical or similar processes or machines are employed in different units.

Particular undertaking controls a

number of firms

• Uniform costing principle and / or practices are employed to ensure that cost figures submitted by members are comparable and consistent.

• This will help the trade association to fix common prices for the whole industry, to improve the operating efficiency of the industry and so on.

A number of firms are the

member of trade association or

industry

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The firm should be willing to share relevant data

Spirit of co-operation and mutual trust should prevail

Mutual exchange of ideas, methods, special achievements should be frequent.

Bigger firms should share their experience and know how with the smaller firm.

Uniformity should be maintained in case of accounting methods, principles, procedures and production method.

• Through the exchange of information by members, each member is in a position to measure his efficiency and cost against the industry’s standard.

Improvement of operational

efficiency

• Since several undertakings use the same costing systems, costs tend to be similar, and prices are based on reliable information which is representative of the costs of the industry.

Fixing the appropriate selling price

• Because of the uniformity in costing systems and prices, no one can charge extremely higher or lower charges which in turn promotes greater stability of the industry.

Reduces ill competition

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• Service of cost experts can be received jointly with minimum expenditure to the individual member.

Services of cost expert

• When comparison of each other’s cost of production or methods of manufacture is made, it is possible to ascertain the profitable or unprofitable products or operation.

Weakest point is easily identifiable

• Through uniform costing it is easy to find the weak point and take actions to standardize the costing method.

Ensures increased productivity

• Research into improved methods of accounting can be undertaken by the industry as a whole instead of by the individual member alone.

Research work at a comparatively low

cost

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• For maintaining uniformity, information should be shared with each other in the industry. And if costing data are made available to all, then secrecy can not be maintained.

Secrecy cannot be maintained

• To the small concerns, the introduction and maintenance of uniform costing will be too expensive.

Expensive for small concern

• No specific criteria are there to determine whether the uniformity should be up to the level of prime cost or COGS or manufacturing cost.

Difficulties to determine the

degree of uniformity

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1 • Inter-firm comparison is the technique of evaluating

the performance efficiencies, costs and profits of firms in an industry.

2 • Inter-firm comparison is greatly facilitated if uniform

costing has been used.

3 • Inter-firm comparison requires exchange of

information relating to costs, profits, prices, efficiency on a voluntary basis among participating firms.

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• Inter-firm comparison requires that all relevant and detailed cost information should be collected regarding business firms.

Nature and extent of information to be

accumulated

• In India, inter-firm comparison information is collected by various trade associations, chambers of commerce, National productivity Council, trade journals and periodicals.

Responsibility for collection, co-ordination

and presentation of information

• Information for the purpose of inter-firm comparison is usually collected regularly. After collection, data is compiled and arranged and a consolidated report is prepared for the benefit of business firms.

Method of collection and presentation of

information

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Information regarding cost and cost structure

Labour efficiency and labour utilisation

Machine efficiency and machine utilisation

Return on capital employed

Liquidity and liquid resources

Debtors and creditors

Useful data becomes available to government for formulating economic, commercial and other policies for the well being of the nation.

Information about the industry and business is useful to present & prospective business entrepreneurs.

It develops cost consciousness among the members of the industry.

It encourages business firms to take some positive steps to improve performance and increase efficiency.

It makes a business firm aware of its limitation as compared to the others in the industry.

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Business firms usually do not agree about a common suitable basis for comparison.

If business firms have not established suitable cost accounting system, information supplied by them may not be useful for inter-firm comparison.

Some managements are not convinced about the utility of inter-firm comparison.

Business firms may be reluctant to part with information so as not to help the competitors.

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Meaning of Uniform Costing & its business application

Advantages & Disadvantages of Uniform Costing

Meaning of Inter-Firm Comparison

Benefits & Limitations of Inter-Firm Comparison

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