Traditional Approach Management Accounting and New Aprroach

Topics: Cost, Cost accounting, Costs Pages: 3 (952 words) Published: August 31, 2010
In traditional approach, the exact cost of products or services is probably impossible to determine. The use of direct labor as the activity base made sense when overhead cost allocation systems were first developed. At that time direct labor made up a large portion of total manufacturing cost. Therefore, it was widely accepted that there was a high correlation between direct labor and the incurrence of overhead cost. As a result, direct labor became the most popular basis for allocating overhead. Traditional cost models apply resources to products in two ways. So called direct costs like material and direct labor are attributed directly to the product and other resources are arbitrarily allocated to the product, typically through the mechanism of direct labor hours, labor dollars or machine hours. Sales, marketing and administrative costs are not included in product costs Nowadays many manufacturers and service company find it inappropriate to use direct labor for overhead costing. This is because, a lot of companies now ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and are using computerized system, technological innovation, global competition, and automation. Thus, the size of direct labor used in the production process is decreasing. As a result depreciation on expensive equipment and machinery, utilities, repairs, and maintenance of total overhead cost increase. Many companies take solution by using the machine hours as the basis to allocate the overhead. But even that couldn’t solve the case if manufacturing process is complex. So the most effective method to use is the activity base costing. Management accountant overcome this problem by using activity based costing (ABC) Activity-Based Costing (control. It was developed as an approach to address problems associated with traditional cost management systems, that tend to have the inability to accurately determine actual production and service...
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