Traditional Cost Accounting System †Free Samples to Students

Question: Discuss about the Traditional Cost Accounting System. Answer: Introduction: Managerial accounting reports are important to all businesses. Managerial accounting reports are prepared throughout accounting periods as required as they help managers monitor the businesss performance. A companys management may need to do a report weekly, monthly, quarterly and sometimes daily. The information in managerial accounting reports is very important as they influence the decision-making process to maintain organizational goals and values while at the same time creating value for stakeholders. They facilitate the assessment and management of risk as well as implementing strategies (Sullivan, n.d.). Examples of managerial accounting report include a budget report that enables businesses to analyze each departments performance as well as control costs. Another example is job cost reports that describe the expenses for specific reports. Accounts receivable aging reports is also a type of managerial account report that is critical in managing cash flow especially for busines ses that extend credit to their customers. The control function of management accounting is about monitoring, measuring, evaluating and correcting tangible results in order to make sure that a businesss organizational goals and plans are accomplished. For example, Feedback is one thing that is essential to the control function of management accounting as it is used to evaluate the steps in the implementation of a strategy as well as correct them is necessary. Getting feedback makes it easier for managers to decide whether or not they should let operational activities remain as they are or take corrective measures in order to restore the harmony between them and the companys goals and plans. Previously, businesses used the control function as it is described in the social theory Panopticism, meaning strictly monitoring employees in order to indicate when performance does not meet the requirements in order discipline and punish and punish; these days they use the control in a much more positive and relaxed manner to encourage e mployees to perform more efficiently and not use scare and intimidation tactics. One purpose of product costing is that it helps managers when it comes to making decisions regarding the estimation of marginal costs. For example, in manufacturing companies, of the labor costs do not change over wide ranges of output, then the manager considers the labor costs to be fixed in his decisions regarding various short-term outputs. The next purpose of product costing is that it helps in the estimation of material costs by establishing a reliable bill of materials. Another purpose of product costing is that it facilitates the development of external reports; for instance many students who want to apply to a university program will be presented with a product's costs specifically developed for external reporting; however, these cost do not estimate marginal costs so they can be modified to fit the students preferences. The fourth purpose of product costing is that it facilitates the development of a unit cost for external reporting by estimating labor and overhead costs. That statement is describing the Work-in- Progress journal entry for direct and indirect labor costs. The direct labor costs are put in the Work-in-Process account at the end of every work week while the indirect labor costs are put into the Factory Overhead account. An employee is paid for overtime when he or she has worked extra time other than his or her normal working hours that are set by a federal Act or an agreement with the union. Usually, the overtime is paid at a higher rate than normal; for example, if an employee has worked more than eight hours a day, he or she will be paid double the normal hourly rate for the extra time. Overtime payments can be treated as either direct labor or overhead depending on the circumstances and over time regulation in a company. Overtime payments are treated as direct labor when the extra hours will be paid at a normal rate and is charged to production with the same stipulations as time working during normal hours; also, when the extra time is due to carrying out specific rush instructions or specific tasks to respect a schedule. However, it is treated as overhead when the payment wont be directly charged against production but is recovered as production overhead using overhead recovery rate as well when the overtime is the result of delay or negligence on the part of a member of a specific department. The traditional costing systems involved allocating manufacturing overhead cost to the products that were manufactured. These systems assign the companys indirect costs to the products that were manufactured based on volume (number of units manufactured) and the production machine hours or the direct labor units (Manalo, 2004). By using these, the traditional costing systems are implying that if it were not for a number of units produced and the machine or human labor used in the production, the company would not have overhead costs. In the past this would have been enough and reasonable for an organizations external financial statements; however, in recent years, overhead have been caused by different factors that the traditional systems did not feature such as consumer manufacturing preferences involving diverse and uniform products. Merits and demerits of the activity based costing (ABC) The traditional costing systems have a lot of short comings when it comes to establishing the true cost of producing products per specific customer preferences, and this is the reason why the activity based costing (ABC) has risen to popularity. The activity based costing (ABC) solve the inadequacies of the traditional costing system by featuring other cost drivers other than the number of units produced and machine hours or the direct labor units to establish indirect costs which increase accuracy and reliability (Wilkinson, 2013). Another merit is that the activity based costing (ABC) provides the real information regarding cost behavior, helps minimize costs as well as identify the activities that did not add any value to the product. All of these benefits make the decision-making process much more efficient and reduce errors such as over or underestimations. One of the ABC system's demerits is that is too expensive and complex to implement and manage which makes some businesses owners stick to the traditional product costing systems (Quinn, Elafi, Mulgrew, 2017). Other demerits of the ABC system are difficulties selecting cost drivers due to the complexity of the system as well as unsuitability with smaller businesses. References: Manalo, M., V. (2004). Activity based costing (ABC) vs. traditional cost accounting system among Top 500 corporations in the Philippines. Retrieved from https://www.dlsu.edu.ph/research/centers/cberd/pdf/papers/Working%20Paper%20Series%202004-11.pdf Quinn, M., Elafi, O., Mulgrew, M. (2017). Reasons for not changing to activity-based costing: a survey of Irish firms. PSU Research Review, (1) 1, pp.63-70. Wilkinson, J. (2013). Activity-based Costing (ABC) vs Traditional Costing. Retrieved from https://strategiccfo.com/activity-based-costing-abc-vs-traditional-costing/