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In practical terms you can not provide for the costs of the system provides accurate information on a regular basis and permanent, because the expansion in data collection and analysis, as well as the expansion of the accuracy of the analysis, leads to increased cost of establishing and operating system costs. May increase the cost of supply continuous information on the economic return is expected of them depending on the cost systems followed in each facility separately. Each entry features a system or systems of the various costs that distinguish its own properties, and each entrance also disadvantages. One of these entrances entrance traditional costs.
Look at the traditional system of costs:
This has been the entrance - the entrance of the traditional costs - is the optimal method for several years and the entrance, a method most commonly used, which is based on:
First, the allocation of indirect costs so that all intended in production centers.
Secondly, the indirect costs charged to each production center re-loaded on the products as the number one just under the rate of loading and one for the center.
Third: The loading rate in the top rate is calculated under a certain load basis and that was the basis for loading the most common is the number of hours of operation of machines and the number of hours of direct labor, though the latter basis is the most common at all is known to be associated with all of these bases the size of the production.
Cost Accounting for activity-based costing system on the basis of activities based on the basic idea of the link between resources used and the activities that these resources are used, then the link between the costs of activities and between the final product.
Where that during the last two decades of the twentieth century, science has undergone a private accounting and cost accounting for radical changes as a result of entering into the era of information and communication technology, which summoned the formation of accounting theory fit those changing circumstances.
During the last fifteen years a revolution occurred in the application and cost management practices, have originated cost accounting activities in the eighties as an alternative to the traditional activities of the standard costs, which lasted since the beginning of the twentieth century, without any substantive changes. The integrated cost accounting activities with other techniques to manage the cost, such as:
1 the cost of improvement and continuous development
2-cost target
3 Cost Reduction through the value chain.
4 production strategy without flaws
5-procurement system and production in a timely manner
6 cost of the product life cycle.
7 the cost of the overall quality.
The traditional
method of cost accounting refers to the allocation of manufacturing over head costs to the products manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours. We will use machine hours in our discussion.By using only machine hours to allocate the manufacturing overhead to products, it is implying that the machine hours are the underlying cause of the factory overhead. Traditionally, that may have been reasonable or at least sufficient for the company's external financial statements. However, in recent decades the manufacturing overhead has been driven or caused by many other factors. For example, some customers are likely to demand additional manufacturing operations for their diverse products. Other customers simply want great quantities of uniform products.
Activity Based Costing (ABC)
is one of several approaches to job costing. Traditionally, job costing has been measured by allocating all direct costs associated with a certain job as well as 'a fair share' (usually based on direct labour hours or volume) of the total indirect costs/overheads incurred across all product lines. This traditional approach was appropriate to production that was labour-intensive, attracted a low level of overheads and enjoyed a fairly uncompetitive market. In more modern times however, production is increasingly machine-driven, overheads are higher (due to more rapid depreciation of equipment, maintenance and electricity costs) and products compete in a global market. Activity Based Costing seeks to identify the causes (or drivers) of indirect costs and apply them more selectively to particular 'activities'. This means that product lines which are simple and quick to make in large quantities will be 'costed' more competitively, only including overhead costs 'caused' by that particular job; while smaller more specialised product lines will be costed at a higher rate. Under a traditional job costing approach which allocates overheads in proportion to volume, the simple product line producing large quanities would have attracted a far greater share of the indirect costs making it less competitive in the marketplace.
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In traditional cost allocation system all overhead or indirect costs were allocated to products, processes or jobs in proportion to a predetermined overhead allocation rate using an appropriate cost driver. The most widely used cost drivers for overhead allocation were either Direct Labour Hours or Machine Hours consumed by each activity. All costs irrespective of the nature was charged using the same cost driver.
In Activity Based Costing every cost element is first charged to a cost pool which is then allocated to products, jobs or processes using a cost driver which is appropriate for the pool. For example.
In ABC the cost driver for allocation of depreciation of factory building can be covered area of the floor. The cost driver for machine setup costs shall be number of setup or number of production runs, etc.
