Traditional Cost Accounting Essay

Abstract

Variable costing and absorption costing produce different net operating income figures and the differences can be quite large

Job-order costing and process costing are two common methods for determining unit product costs Ordinarily, variable costing and absorption costing produce different net operating income figures, and the difference can be quite large. absorption costing is the most common approach to product costing throughout the world. absorption costing—the most widely used method of determining product costs—can artificially increase profits when managers choose to increase the quantity of units produced. Numerous organizations have incorporated activity-based costing in their method of calculating production. Activity-based

Traditional cost accounting (TCA) method refers the absorption costing where all manufacturing cost, both fixed and variable are assigned to a unit of production (Garrison, Noreen, & Brewer, 2015). Under traditional cost accounting units of production include the distribution of manufacturing overhead cost to the products assembled and Indirect costs assigned to the Items manufactured on the basis of quantity produced such as the number of units manufactured and the direct labor hours or production machine hours that are used to make the product. A basic traditional costing example would be a company that makes widgets makes 1 million of them per year. To do it, it could require five full-time employees, each working 2,000 hours, plus another three supporters, also working 2,000 hours each. In the process of making widgets, it spends $1 million. Its overhead rate would be the result of dividing the $1 million in cost by the 10,000 hours of direct labor. This works out to $100 per hour (Lender,

For this reason, traditional based cost systems misrepresent the cost of the product. In other words, it is assumed that each time a unit of product is manufactured it incurs a cost. The method is not totally useless and can be used on certain direct costs. However, for activities that are not performed directly on the product, the method is flawed at best. This is due to the fact that most companies today are made up of more complicated cost drivers and activities. The traditional cost accounting system end up with cost of goods sold on the bases of absorption cost and includes production costs that can only be used in external reporting. “Fundamentally, traditional costing systems try to assign cost directly to products, rather than to activities first and then from the activities to product units. The typical cost report gives information on what is spent, but not why it is spent” (Marx, 2009). As stated before job-order costing is one of the traditional systems and is used when many different jobs or products are worked on each period. Some examples of business that use traditional cost accounting include greeting card companies, commercial aircraft production, major construction companies, Medical service industry, law firms and retail companies. Process cost accounting is also a traditional accounting system that is used when mass production of similar unit production cost cannot be