Accounting and finance Assignment PDF

ACCOUNTING AND FINANCE- Management Accounting
Executive Summary
The report seeks to critically analyse the traditional methods of costing of products and services. The
importance and relevance of those method in today’s costing environment. The report goes on to
further detail that the cost allocation under traditional method do not hold much significance in
today’s business environment. The report also tries to align traditional and modern should be used
together as traditional method is short term oriented while modern costing is long term oriented.
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Table of Contents
ContentsExecutive Summary...............................................................................................................................1
Table of Contents..................................................................................................................................2
Introduction...........................................................................................................................................3
Analysis..................................................................................................................................................3
Cost Allocation under Traditional Costing System.............................................................................3
Cost Allocation under Modern Costing System.................................................................................4
Traditional Cost System.....................................................................................................................4
Limitations.............................................................................................................................................6
References.............................................................................................................................................7
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Introduction
Costing System shall mean to define a system through which cost are allocated to cost objects. Thus,
cost assignment is the main objective of costing. Further, there are two methods of costing i.e..
Traditional Method and Modern Method.
Traditional Costing method has its origination in the mid of twenty century on account of
automatization of manufacturing. The primary concern under traditional method of costing was on
cost of manufacture of production and methods of allocating indirect cost of production to services
and products. However, there has been noted change in business environment in the end of twenty
Century and beginning of 21st Century which enabled and led to the development of modern tools of
accounting. The main purpose of modern accounting is to provide management with information that
helps in judging the profitability and true cost of services, projects, products, activities, consumers
etc.
The fact that led to the development of Modern accounting has been technological development,
change in Consumer’s Preference, global Competition and survival issues, true costing of a particular
product instead of random allocation.
Brief Facts
Traditional Method no longer hold importance in the costing field as they don’t provide information
on potential areas where cost can be saved as the same is the niche area in today’s cut throat
competition market. As in current times, prices of products are less amenable while cost can be
controlled, thus a requirement for better costing tool led to obsolescence of the traditional method.
There are generally three types of costing used in a manufacturing entity. They are usually (a) Job
Order Costing, (b) Process Costing and (c) Activity Based Costing.
The first two costing system fall under traditional method while the third one is a modern system of
costing. The first two methods depends on process of manufacturing while ABC can be used
irrespective of manufacturing process.
Traditional Costing System
The basic distinction between job costing and process costing system lies in the fact that how cost
object is determined under both these systems. Under job costing, cost object is a job while under
process costing cost object is process. Thus, job costing is applicable for manufacturing process
initiated by customer while process costing is applicable on continuous process and not initiated from
customer end.
Under the method the direct cost like raw material, labour etc are traced to products and services and
indirect cost allocation is a major cause of concern which limits the usefulness of traditional method
of costing. Under this method, they are allocated on the basis of the following cost bases like Direct
Labour Hour, Machine time Hours etc
The method of indirect cost allocation has an impact on the profitability of the product, service, job
etc. Thus, it presents a wrong picture by improper allocating of indirect cost impacting the
profitability.[ CITATION Dut04 \l 1033 ]
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