Uniform Costing: Definition, Objectives, Advantages, Disadvantages

  • Post last modified:7 March 2021
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What is Uniform Costing?

The term uniform costing implies the use of several undertakings of the same costing systems, i.e. the same basic costing methods, principles and techniques.

Like job costing, process costing and operating costing Uniform Costing is not a method of costing. It is a system which is agreed to be accepted and followed by enterprises belonging to the same industry. It is a system according to which the enterprises which have agreed to follow it decide to use common or uniform principles, methods and procedures of costing so that their cost records and performances become comparable with each other.

Comparision of cost data of one enterprise becomes comparable with other member enterprises when the data is compiled by all member enterprises by following the common cost principles and the same method of costing and by following the same procedure of recording of the cost data.

Definition of Uniform Costing

I.C.M.A. terminology defines uniform costing as “the use by several undertakings of the same costing principles and/or practices”.

Defines Uniform Costing as “the use by several undertakings of the same costing principles and practices”. I.C.M.A. terminology

Objects of Uniform Costing

Uniform Costing is adopted to achieve the following objects:

  1. To compare and bring uniformity in the procedure followed for calculation of the cost of production of various enterprises of the same industry.

  2. To eliminate or minimize unhealthy competition among the different units of the same industry.

  3. To improve production capacity level and efficiency of labour by comparing the production costs of different units of the same industry and also by comparing the costs of a unit with the average costs of the industry.

  4. To enable the member-units to know the best system of recording cost data and help them in improving their current systems.

  5. To fix a common sale price for the product manufactured by the memberunits of the same industry.

  6. To encourage exchange of ideas among the member units and make available the benefits of research and development activities of the large size units to the small size units.

  7. To determine common policies to be followed by all the member units based on the cost data provided by each member unit.

  8. To maintain and stabilise demand for the product in the market by exercising proper control on production.

  9. To ensure resonable price to customers and profit to manufacturers.

Pre-Requisites of Uniform Costing

For installation of uniform costing and for the success of uniform costing
attention should be given to the following requisites:

  1. There should be mutual trust, confidence and co-operation among the member units. The managements of the member units should have confidence that the uniform system of costing is for their benefits and any information provided by them to the organisation of the uniform costing will not be misused by it.

  2. The member units should have clear idea about the areas and the extent to which uniformity is to be attained. The broad areas of uniformity should be understood by them. Efforts should be made to avoid hundred percent rigidity in the procedures to be followed for recording of costing data.

  3. A healthy sense of competition should be created among the personnel of the member units. They should understand that the competition among them is with the objective of improving the efficiency of the weak member-units.

  4. All the member units must agree to bring commonness in the methods of costing.

  5. A Uniform cost manual should be prepared by the organisation/trade association for the guidance of the member-units.

Advantages of Uniform Costing

These are important advantages of uniform costing:

  1. A standardised cost accounting system becomes available to each memberunit due to adoption of uniform costing by them. Developing a standard costing system is an expensive work and many small size units cannot afford to incure this expenditure and so they go without such standard costing system. When the units – small size and large size – agree to adopt uniform costing, a central organisation consisting of experts in costing field creates a standardised costing system whose details are provided to each member-unit. Thus by incurring a small amount of expenditure even the small size units can obtain the benefits of using a standard costing system.

  2. Use of Uniform costing enables management of each member unit to compare the costs of its own unit with the costs of the industry. Such comparison enables it to know the areas in which its costs are more and where they are less as compared to the industry’s costs. The managements come to know where there is scope for them to reduce the costs and how such reduction in costs can be achieved. The efficiency of all member units can, thus, be improved and they can produce the products or provide the services at low costs.

  3. The member units know the procedure followed for calculation of costs and they do not enter into unhealthy competition with the other units. Uniform costing leads to competition among member units but such competition is a healthy competition since the units are enlightened about the details which make up the total cost.

  4. Information available due to uniform costing enables the central organisation or the trade association to know the cost of production of each member unit. Using this information it can fix a Standard Selling Price for the product or service in such a way that the unit whose cost of production is more will be able to get a certain minimum margin of profit.

  5. When a standardised price-list is published by the central organisation, it creates confidence among the customers that they are purchasing the products / services at reasonable prices. Creating this confidence, especially about the prices charged by the public sector undertaking is very important and this becomes possible only due to use of uniform costing system.

  6. Uniform cost accounting facilitates the work of wage boards set up to fix minimum wages and fair wages for the workers of an industry.

Disadvantages of Uniform Costing

  1. Business units belonging to an industry differ from each other. They may be of different sizes, using different methods of production, different costing techniques and producing different volumes of output. In such situation deciding a uniform costing system which will suit all member units is a very difficult matter.

  2. Success of uniform costing depends on complete co-operation among the member-units. As the units are under different managements creating and maintaining such co-operation for a long period may not become possible.

  3. Uniform costing requires that each member unit should give true and complete information about the various costs periodically in the agreed format. For this full confidence on the part of member unit is required towards central organisation and other member units. Lack of confidence will reduce the utility and success of uniform costing.

  4. Use of uniform costing may lead to establishment of a single selling price for the product of an industry. This may result in creation of monopoly in the industry and exploitation of customers and workers. Such conditions are not in the interest of the economy.

  5. In units belonging to the same industry there may be vast disparity. Some units may use labour intensive methods while other units may be using mechanization for production. Finding out and implementing the uniform costing principles, methods and techniques in such situation may not become possible.

  6. Idealy it is expected that the large size units should share the information which has become available to them through research and development activities with the small size units. If, however, we consider the practical side, the managements of the large size units may keep such information secret and are not willing to share it with other units. If this happens, uniform costing will not become successful.

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