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The traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours. We will use machine hours in our discussion. By using only machine hours to allocate the manufacturing overhead to products, it is implying that the machine hours are the underlying cause of the factory overhead. Traditionally, that may have been reasonable or at least sufficient for the company's external financial statements. However, in recent decades the manufacturing overhead has been driven or caused by many other factors. For example, some customers are likely to demand additional manufacturing operations for their diverse products. Other customers simply want great quantities of uniform products. If a manufacturer wants to know the true cost to produce specific products for specific customers, the traditional method of cost accounting is inadequate. Activity based costing (ABC) was developed to overcome the shortcomings of the traditional method. Instead of just one cost driver such as machine hours, ABC will use many cost drivers to allocate a manufacturer's indirect costs. A few of the cost drivers that would be used under ABC include the number of machine setups, the pounds of material purchased or used, the number of engineering change orders, the number of machine hours, and so on.
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What is the criticisms of current cost accounting method?
Itemise and evaluate the criticism of traditional cost of accounting system?
What are the new approaches used in cost accounting?
cost of production report lifo method fifo method
What is cost absorption in cost accounting and work examples?
A managerial accounting cost method of expensing all costs associated with Manufacturing a particular product
Is it true that stock investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock?
the stock investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock
How is cost accounting impact in financial accounting?
Cost accounting mainly becomes a decision making issue. However, it does impact financial accounting with regards to the inventory account on the balance sheet statement and cost of goods sold on the income statement. It is used in manufacturing firms in order to cost there inventory which is not as easy as a retail firm that really justs costs products at the purchase price. While your countries accounting board regulates the method (generally absorption costing) there is significant debate in accounting theory as to which method (variable or absorption) is a better costing method.
What is an advantage of the traditional line item budget?
The traditional method of cost accounting assigns the indirect costs of the factory to the production machine hours, units produced, or the direct labor hours. The disadvantage of this method is that there are more factors that contribute to the overhead therefore making this method inadequate in determining the actual costs it takes to produce a product.
What is the traditional costing formula?
Traditional costing is a method in accounting where the manufacturing overhead costs are allocated to the products manufactured. It is also called as conventional costing.
Why traditional cost systems distort product costs because?
they emphasise financial accounting requirements
What are the methods for accounting inflation?
Discuss the various methods of inflation accounting.
The definition of push down accounting?
A method of accounting wherein the financial report of the subsidiary reflects the parents cost incurred in acquiring the sub.
What doese FCA mean?
FCA can be Full Cost Accounting, which is a method of accounting or False Claims Act (US federal law).
What is the difference between Activity-based costing and traditional cost accounting?
Activity-based costing is a more accurate cost management system than TCA. One would use the ABC method when overhead is high, products are diverse, cost of errors high and competition is stiff. Traditional Cost Accounting is unable to calculate the 'true' cost of the product. TCA arbitrarily allocates overhead to the costs of objects. Total company's overhead is allocated to the products based on volume based measure e.g. labor hours, machine hours.
