Uniform costing and inter-firm comparison

1. Meaning

Uniform costing is the use of the same costing principles, methods and practices by several undertakings, usually in the same industry. CIMA: “the use by several undertakings of the same costing systems, i.e. the same basic costing methods, principles and techniques.” It is not a separate method of costing like job or process costing; it is an agreement among firms to account for cost in the same way so that their figures can be compared. It is usually sponsored by a trade association.

2. Objectives and purposes

1. Comparison of costs between member firms, the basis of inter-firm comparison.
2. Fixing fair prices for the industry, especially where the government regulates prices or pays on a cost-plus basis.
3. Eliminating unhealthy price competition based on wrong cost figures.
4. Locating inefficiency: a firm whose cost is far above the average learns where to look.
5. Spreading good practice: small firms gain the costing methods of the best firms without the expense of developing them.
6. Data for government on tariffs, subsidies, wage awards and price controls.
7. Industry research on costs, productivity and capacity.

3. Essential requisites

• Similar industries: products, processes and scale reasonably alike.
• Co-operation and mutual trust among members, and willingness to disclose information.
• A central body (trade association or an independent agency) to frame and administer the scheme and keep data confidential.
• Agreement on the points of uniformity (section 4).
• A uniform costing manual setting out the agreed principles.
• Members with a reasonable standard of existing records and trained staff.

4. Development of uniform costing: points of uniformity

The scheme is developed by a committee of the association, which studies members’ existing methods and agrees on:

1. The method of costing (job, process, unit) and the cost unit.
2. The classification of costs and the code of accounts.
3. The pricing of material issues (FIFO or weighted average) and treatment of scrap and waste.
4. The treatment of labour cost: idle time, overtime, bonus.
5. Overheads: bases of apportionment and methods of absorption.
6. Depreciation method and rates.
7. Items excluded from cost (interest on capital, abnormal losses).
8. Valuation of work-in-progress and stock.
9. Forms and reporting periods.

These are written into a uniform costing manual given to every member, with a glossary of terms, the forms, and the accounting procedure.

5. Merits and demerits

Merits: comparable figures across firms; a common price policy; small firms gain expert methods cheaply; inefficiencies exposed; useful to government in price fixation; reduced cost of developing a system; healthy competition on efficiency rather than price-cutting.

Demerits: firms differ in size, location, age of plant and methods, so complete uniformity is rarely possible; members are reluctant to disclose costs; the scheme may become a tool for price rings or cartels (which could raise concerns under the Competition Act, 2002); it may be rigid and slow to adapt; and costly for very small members.

6. Inter-firm comparison

Inter-firm comparison (IFC) is the systematic comparison of the performance, efficiency, costs and profits of firms in the same industry, through a central organisation that collects their figures in a uniform form and circulates the results without disclosing identities. Uniform costing is its pre-condition.

Procedure. (1) A central body (association, productivity council, or consultancy) is set up. (2) Members supply data on agreed forms: costs, ratios, output, capital employed. (3) The centre checks, processes and computes ratios: return on capital employed, profit to sales, cost of each element to sales, stock turnover, output per worker. (4) Results are circulated by code number, with averages and the best figures, so each firm sees where it stands. (5) The centre may advise firms on remedies.

Advantages: shows each firm its weak points against the industry average and the best performer; encourages cost consciousness; helps fix fair prices; gives the industry and government reliable data; and costs each firm little.

Difficulties: fear of disclosure to competitors; lack of a proper costing system in some firms; differences in accounting methods even under a uniform scheme; differences in size, age of plant and product mix that make comparison misleading; and cost of the central body. Remedies: strict confidentiality by code numbers, a neutral central body, and comparison within size groups.

How this is examined

The 16-mark question combines objectives and requisites; write seven objectives and six requisites, and add the points of uniformity as “development.” For inter-firm comparison, define it, give the five-step procedure, then advantages and difficulties. The two topics can be answered together because uniform costing is the foundation of inter-firm comparison.