What is Traditional cost Accounting ?

Definition of Traditional cost Accounting

Traditional cost Accounting

Traditional cost Accounting is a costing system in which all the manufacturing cost is assigned to the product being made. Traditional costing is also known is conventional costing.

Elements of manufacturing cost includes Labor, material and other expenses.

Traditional cost Accounting

Material cost: Cost of material used in any product.

Labor cost: It the pay per hour required to make the labor perform his duties.

Other Cost: Other cost included administrative cost, selling cost, electricity cost, distribution and other overheads.(This is not normally added to the cost in Traditional costing Method).

 

These costs can be both Direct and Indirect.

Cost of product is calculated to set profit margins and hence selling cost. For example Material and labor costs are accumulated and expenses are estimated. After then profit margin is added and price of product is set.

There are however some deficiencies with this system of accounting.

  • This method only includes manufacturing cost while estimating the expense of a product and ignores other overheads like administrative cost which also are also the expense related to the same product.
  • This gives an inaccurate cost estimate of a product.
  • Labor cost is deteriorating because of the current technology interference more than human or labor hours. Hence this costing system is considered outdated.

Benefits:

  • It is easy and simple to use and apply.
  • It liaise with the General Accepted Accounting Practice GAAP.

Other Method in contrast to Traditional costing system is Activity Based costing. This was developed to account for the inaccuracies found in traditional cost accounting.

As it’s name suggests it takes into account and assign cost to product according to the exact cost drivers. In this method cost is calculated by considering every expense related to the product.

Benefits:

  • Accurate cost estimation.
  • Hence accurate profit margin estimation.
  • Better understanding of different overheads.

Dis Advantages:

  • Difficult and expense to implement.
  • If the user is not known to this method then this can be easily misinterpreted.
Previous Post
Newer Post