Traditional volume based product costing

Tying to direct labor costs, a traditional overhead costing system becomes a volume-based costing system. Moreover the establishment of cost drivers can help management into the reappraisal of operations carried out in the business.

Finally, In table 5 you can see a comparison of the two methods.

Volume-Based Overhead Rate: Definition, Features and Limitations

The spread of overheads to products was based on the assumption that a specific work required either more labour hours or more machine hours to be carried out. For external reporting, companies still use the traditional costing system, but it is becoming obsolete as outsiders demand more accurate information about businesses.

It is more suited to businesses with high overhead costs that manufacture products, rather than companies that offer services. Accountants created the ABC method to solve the problems of inaccuracy that result from the traditional costing approach.

Thus, companies that apply plant-wide and departmental overhead rates to assign overhead costs to products often do not produce reliable cost data. This result was finally divided by the units produced to give us the overhead cost per unit?

Discuss how the concepts of fixed and variable costs are viewed in ABC. Production is now automated and computerised. Nowadays the production processes are more complex since companies produce different ranges of products for a more sophisticated consumer. Functional-based volume-based costing system has the following features: The primary assumption of ABC is that cost is caused by activities and not by products.

Companies that manufacture a large number of different products prefer an activity-based system because it gives more accurate costs of each product. Support activities cause the following expenses: Describe how activity measures are chosen when using the ABC approach. One of these is easy to use and inexpensive to implement, while the other costs more to use but gives you greater accuracy.

Factory overheads are a small fraction of the labor cost and are deemed as resources expended to support labor activities. As firms operating in this competitive environment adopt new strategies to achieve competitive excellence, their cost accounting systems often must change to keep pace.

Pros and Cons of Activity-Based Costing Activity-based costing is the most accurate, but it is also the most difficult and costly to implement.

Traditional Costing Vs. Activity-Based Costing

The following are the limitations of volume-based costing system: Overheads now-a- days constitute a very high proportion of total costs as compared to direct labour. Traditional product costing system is also referred to as functional-based cost accounting system or volume-based costing system.

Since many types of indirect resource costs are caused by, or driven by, non-production volume related product characteristics such as size and complexity, traditional costing tends to distort product costs.

The costs that are associated with the same cost drivers can be grouped into cost pools. This method was used since, firstly, it is the basic method of traditional volume-based costing, and secondly, we are not told how to apportion reciprocal services to the two departments; therefore since we can not apportion the costs between the two departments, we must apportion the total cost as a whole.

As volumes units change, direct labor costs, as do overhead costs, vary in proportion to changes in units of production.

Different products utilize different amount of resources, which is not recognized in traditional costing system. The following example can illustrate the above — Question A used as example: Pros and Cons of Activity-Based Costing Activity-based costing is the most accurate, but it is also the most difficult and costly to implement.

Under the traditional method of allocating overhead based on direct labor dollars, the total costs for all balls would be divided by total direct labor dollars for all balls to determine the per unit cost.

More and more factory overheads, such as setup cost, materials handling cost, and product design and research and development costs, are unrelated to the number of units produced. This should not affect the end result, since the total cost to be allocated would of course be the same in both cases.

Thus, at present, overheads are less affected by production volume as in conventional costingbut more by range and complexity of products manufactured. Similar distribution channels, customer demands and customers.Volume-based costing (also called traditional costing) is a product costing system when an entity allocates factory overhead costs to a single cost pool (e.g., factory overhead) and then uses volume-based cost drivers to allocate factory overhead costs to individual products or services.

B “Traditional volume-based costing systems tend to overcost high-volume products and undercost low-volume products. ” Discuss the validity of this statement. Absorption or Traditional Costing is defined by CIMA as “the procedure which charges fixed as well as variable overheads to cost units” [1].

Activity Based Costing Costing vs Traditional Costing. In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect costs to products.

Activity-Based vs Traditional Costing

Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional product costing system is also referred to as functional-based cost accounting system or volume-based costing system.

Traditional (or conventional) product costing system determines product cost by way of allocating, in the first stage, direct costs to the products and then subsequently adding a proportion of overheads deemed to be related to the units produced.

Under the traditional method of allocating overhead based on direct labor dollars, the total costs for all balls would be divided by total direct labor dollars for all balls to determine the per unit cost.

Free Essay: Q. A. 1.

Traditional Costing Vs. Activity-Based Costing

- Calculate the Unit Costs for Product A and B using the traditional volume-based product costing system. The Overhead costs of Duo plc.

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Traditional volume based product costing
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