Different Types Of Costing System

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In this essay I will be discussing two different type of costing system and how they can affect the organisation and what benefits or disadvantages a company can have after implementing these costing systems. Firstly I will talk about the traditional costing system it 's advantages and disadvantages, then I would do the same for the activity based costing systems, also I will mention about how these two systems are different from each other, how these systems are used in the real world by citing some examples of how companies implement these systems what obstacles they have to overcome and after implementing what are the outcomes of using these costing systems. in the end I will conclude my discussion by choosing either traditional costing…show more content…
"Traditional costing system assigns the overhead costs to products on the basis of their relative usage of direct labour. For this reason traditional cost systems often report inaccurate product costs". (Marx, 2009). Problem is in the fundamental practice of traditional costing. Organisations follow the assumption that products cause cost, each time a unit is manufactured, it is expected that cost is sustained this method works for some direct costs and does not represents activities not been accomplished directly on the product unit. "In traditional model there are limited pools of indirect costs for every section or the entire manufacturing unit. The different kind of costs in this system is generally based on an indirect cost driver which is normally financial based" (Drury, 2008). The approach with most overhead activities is that the proportions of the activity essentially consumed by a specific product, does not resemble with a single cost driver. Today’s day and age most modern companies use both manpower and technology to produce the products and traditional costing model only employs volume based driver such as direct labour hours and machine hours for the assignment of all production overhead costs. The traditional cost model ends up with the cost of products sold established on absorption costing and contains only product costs as defined in financial accounting. Basically traditional costing system allocate costs directly to
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