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A costing system accounts for the cost of producing goods or providing services. Implementing this system begins with establishing a baseline for the company's current production costs. Including management and sales personnel in the process is crucial for a successful implementation. After the new costing system is in place, gains in efficiency are then measured.
Considering that a costing system is a method of accounting, the process of establishing a baseline requires the expertise of an accountant or, more typically, a team of accountants. This team analyzes and records the entire scope of the costs of production. It also reviews all of the inputs and outputs of the system. Without establishing a baseline first, the company's managers will not be able to compare gains or losses after the launch of the new system. The goal of implementing a costing system is to streamline production and gain efficiency, so the lack of a baseline will hinder the effort to measure actual gains.
Company personnel who are not involved in the production process should be included in the implementation, too. If not, they might lack an understanding of the costing process. As a result, they might not buy into the need to implement those steps necessary to account for costs within their areas of responsibility.
In implementing a costing system, productivity is assessed and improved through understanding cost drivers. A cost driver is a measurable unit of labor that increases or decreases the costs of a change in activity. For example, a positive cost driver would be a change in an aspect of production that shaves two minutes off the time required to make a part on an assembly line. In turn, a negative cost driver might consist of completing an outdated form that asks for unnecessary information.
From an accounting standpoint, the cost to make a product is actually viewed as a series of costs. This series includes the costs of acquiring an unrefined material, manufacturing a product, then storing that product. Each individual part of this production stream must be measured and accounted for regardless of what costing system might be used.
There are a variety of costing systems used by businesses. Process costing focuses on the cost of making an item or a batch of items. In just-in-time costing systems, all of the manufacturing activity is allocated to a single account. The elements of this manufacturing activity, in its entirety, are referred to as resources in process.
Job costing measures the costs per job. A plumber might use a job-costing system. In activity-based costing systems, the main benefit is measuring the impact of each activity as resources are used. This can reveal those hidden costs that are not itemized in the other accounting systems.