Does cost accounting systematically distort product cost?

Answer 1

Cost accounting has distort product costs due to:

• Conventional cost accounting distorts management's view of business through unrepresentative overhead allocation and inappropriate product costing.

• Traditional approach usually absorbs overhead costs across products and orders solely on the basis of the direct labor involved in their manufacture.

• Direct labor as a proportion of total manufacturing cost continues to fall, this leads to more and more distortion and misrepresentation of the impact of particular products on total overhead costs.

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• The failure of fixed cost allocations, as firms introduce more automated machinery, direct labor is increasingly engaged in setup and supervisory functions and no longer represents a reasonable surrogate for resource demand by product.

• Inability of the two stage cost allocations system to report variable cost was a common feature of many costs system.

• The failure of Marginal Costing when variable costs of labor, material and some overhead were relatively low proportion of total manufactured cost, and product diversity was large.

• The short-term perspective variable cost system is rejected, because the decision to offer a product, creates a long-term commitment to manufacture, market and support that product.

• The cost of complexity is hidden, the more complex production environment requires extended manufacturing-support facilities, such as setups, expediting, and scheduling activities.