The Shortcomings of Traditional Costing Systems/Methods in a Modern Manufacturing Environment

The shortcomings of traditional costing systems/methods in a modern manufacturing environment

The traditional costing system is way of allocating overheads or indirect costs that are related to the production of units. These costs are assigned to and rationed to each product by respect of the amount of units produced, labor hours utilized or the production machine hours. This is no longer of relevance in the modern manufacturing environment due to the fact that this forms the assumption that only one of the above mentioned variables is responsible for the incurred indirect or overhead costs. This means that only one of the factors can be regarded as a driver (e.g. direct labor or machine hours).

Evidently the assumption shown above is incorrect as other factors such as diversity and variety with regards to the products produced could result in supplementary manufacturing operations, a reduction in labor required or measurable increase in units produced. This goes to say that there are many different sources of indirect or overhead costs that make it worthless to calculate according to the traditional costing system.

A far more extensive and accurate method of cost accounting is the modern activity based costing (ABC) method. This method applies more than one factor or variable as suggested in the traditional method, which means that it will include all factors ranging from direct labor hours and machine hours to kilograms (or tons) of direct material acquired. Where in the traditional method all the total costs are accumulated in one “cost pool” and evenly divided amongst all the products irrelevant of each products’ input costs, the ABC method prevails over the previous method because there are many different “cost pools” amongst which the factors are divided.

In this case study I believe that it is vital for Poseidon Engineering Works to change the job costing system that they are currently using to a more viable and efficient costing system such as...