Traditional Costing System
Traditional costing system involves assigning manufacturing overhead cost to the manufactured goods (Pettersson & Segerstedt, 2013. pp.357-363). It allocates indirect cost to manufactured goods basing on the number of units manufactured and takes operating expenditures as a distinct collection of indirect costs. It is the best when there are lower indirect costs than the direct costs. Using machines in allocating overhead cost imply that machines hours underlie the cause of factory’s overhead (Agrawal, 2016.p. 154).
The process of Traditional costing system
The process of traditional costing systems involves identification of indirect costs, estimation of indirect cost for suitable period and choosing of a cost driver with an informal connection to the cost (Jafari, & Rodchua, 2014.pp222-234). Besides it involves the estimation of an amount for the cost driver for suitable periods (Banker, & Kaplan, 2014.pp 193-203). Another step is the computation of predetermined overhead cost after which there is an application of overhead to products using the predetermined rate.
Traditional costing system aligns with established bookkeeping principles. Besides, it guarantees easy performance of firms that produce one manufactured goods (Li, Sawhney, Arendt, & Ramasamy, 2012. pp.33-48) It is also easy to apply because managers can trace direct costs associated with a product. It could also offer good ideas on the cost of manufacturing product for business manufacturing large amounts of products (Akhavan, Ward, & Bozic, 2016. pp.8-15)
However, this system is outdated due to the use of machines and computers for production process because it uses direct labor hours to compute the fee (Kaplan & Norton, 2001.pp147-160). Besides, the price is not allotted correctly because these hours are not the best driver to utilize (Javid, Hadian, Ghaderi, Ghaffari, & Salehi, 2016.p 165). It also contradicts other drivers that contribute to the price of a good (Armstrong, 2014.pp 154-166). Businesses with more overhead expenses require a reliable method to allocate costs thus using the incorrect system affects the business competitive advantage (Linassi, Alberton, & Marinho, 2016). Finally, it can lead to poor management decisions because it excludes certain nonmanufacturing cost (Cooper & Kaplan, 1988 pp.96-103).
In conclusion traditional system important though has disadvantages like being outdated and poor management decision. It is important in offering ideas to firms that produce large quantity of goods thus should not be ignored.
Agrawal, H.O., 2016. An Approach to Business Strategy. Handbook of Research on Promotional Strategies and Consumer Influence in the Service Sector, p.154.
Akhavan, S., Ward, L. and Bozic, K.J., 2016. Time-driven activity-based costing more accurately reflects costs in arthroplasty surgery. Clinical Orthopaedics and Related Research®, 474(1), pp.8-15.
Armstrong, P., 2014. Limits and possibilities for HRM in an age of management accountancy. New Perspectives on Human Resource Management op. cit. at, pp.154-166.
Banker, R.D. and Kaplan, R.S., 2014. William W. Cooper: Innovator, Fighter, and Scholar. Accounting Horizons, 28(1), pp.193-203.
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Javid, M., Hadian, M., Ghaderi, H., Ghaffari, S. and Salehi, M., 2016. Application of the Activity-Based Costing Method for Unit-Cost Calculation in a Hospital. Global journal of health science, 8(1), p.165.
Kaplan, R.S. and Norton, D.P., 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part II. Accounting Horizons, 15(2), pp.147-160.
Li, X., Sawhney, R., Arendt, E.J. and Ramasamy, K., 2012. A comparative analysis of management accounting systems’ impact on lean implementation. International Journal of Technology Management, 57(1/2/3), pp.33-48.
Linassi, R., Alberton, A. and Marinho, S.V., 2016. Menu engineering and activity-based costing: an improved method of menu planning.International Journal of Contemporary Hospitality Management, 28(7).
Pettersson, A.I. and Segerstedt, A., 2013. Measuring supply chain cost. International Journal of Production Economics, 143(2), pp.357-363.