What is a Costing System?

Malcolm Tatum

Costing systems are components of a broader accounting system used by a given company or organization. Their main function is to keep a focused eye on expenditures made by the company. While the data that is collected and generated is also integrated into the overall accounting system, the costing approach allows for the data to be easily extracted for reports to upper management.

Manufacturing is an operational cost.
Manufacturing is an operational cost.

The information that typically is gathered by a costing system allows owners and managers to quickly identify the current status of two key factors that are relevant to the success of the company: operational costs and performance cost. Operational costs are often the foundation of the data collected by the system, and with them, management is able to get a snapshot of all expenditures that are directly connected with the general operation of the organization, especially in terms of production costs. Performance cost allows management to view any and all expenditures that are related to helping the company remain profitable, less the direct cost of operations. Expenses associated with marketing, public relations, and sales efforts are examples of the type of expenditures that are captured in the performance cost module.

Sales is a performance cost.
Sales is a performance cost.

A costing system is not intended to replace an accounting system. Instead, the systems actually work within the broad framework of general accounting systems to extract specific data for quick and easy analysis. By making use of one, it is possible to quickly identify expenditures that were intended to benefit the company, but that are failing to do so in a significant way. This makes it possible for owners and managers to make the necessary adjustments to the company’s working strategy and exercise a more responsible use of available resources.

From this perspective, it can be said that regular use of a costing system can help to minimize waste and also make it possible to direct available resources in more productive directions rather than continuing to spend money on items that are accomplishing little or nothing for the company.

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Discussion Comments


@SkyWhisperer - Yeah, I remember I had an economics professor who was particularly controversial. He said once you have fixed costs, you take them into account and then you forget them. Then I ran into other guys who said that in standard costing system you had to spread your fixed costs out over the life of the product.

I don’t know who is correct. I think there’s a lot of creativity in accounting as to how you allocate your costs and therefore come to a true estimate of profit. It sure makes it tougher than running a lemonade stand.


In my college accounting class we learned about the traditional costing system where they explained the difference between fixed costs and variable costs. Fixed costs were things like rent and stuff and variable costs could, of course, change over time. I don’t know what is being taught today but I think these probably remain consistent rules of thumb for beginning a breakdown of costs.


It sounds like there could be many different ways to organize a costing system, as long as someone is keeping track of all the numbers and where they came from and are going.


Describe the factors that should be considered before implementing a costing system?

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