The Methods Of Carrying Out Businesses Activities

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Huge technological and globalization developments are changing the methods of carrying out businesses activities. The companies are increasingly investing in the technological developments to make the budgeting process more accurate. The developments have led to many businesses operated international through the internet. They need a reliable costing method to facilitate accurate estimation of the costs and the profit to makes plans on how the business would compete effectively. The traditional budgetary method has failed to address the emerging needs of the business by identifying more specific cost drivers of the overhead costs. The traditional budget is a rigid accounting tool and hence its application shoulb be discarded. The…show more content…
The traditional budgeting methods have failed to meet increasing complexity and changing needs of the organizations. Many of the managers of the major organizations believe that the traditions costing methods bring serious cost distortions that hinder the strategic decision-making process. More so, the traditional budgeting method encourages a behaviour that is against the efficient utilization of the company resources and the objectives of the companies. The traditional budgeting model is built on an erroneous understanding of the overhead apportionments. Mostly, the companies use the labour hours, and the machines hours to allocate the overheads into different cost units. In reality, a single cost driver like the labour hours and the machine hours does not affect the incurrence of the overheads. The rate of consumption of the materials or the labour hours differs among the various product lines and the departments. Some products lines may consume a little amount of a given type of an overhead compared to another. When the absorptions rate used is not the real costs driver of the overhead used in a given product line, the costs will be either over or underestimated (Richards, 2011, p.78). The use of overall absorption rate produces information that is unreliable for use by the managers. They have to come up with strategies to control costs and compete effectively in the market. The
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