Page 28 - P1 Integrated Workbook STUDENT 2018
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Chapter 2
1.2 Problems caused by traditional costing methods
Traditional costing is less useful for the following reasons.
Too little detail on the most significant cost – the largest cost of production is
indirect overheads but these are categorised together in one figure that lacks
detail and is not useful to management.
Cost control is more difficult – because management does not know what the
components are of the largest production cost (indirect overheads) they cannot
implement proper cost control.
The allocation of costs is unrepresentative – the costs are often allocated
between products on the basis of direct labour hours – despite the fact that
direct labour is becoming a smaller proportion of product costs and does not
fairly reflect the relationship between the products and the indirect overheads.
Poor pricing and decision making can result – because costs are inappropriately
or inaccurately shared between products it means that the total production cost
can be wrong which can lead to poor pricing and production decisions.
Under activity based costing (ABC) the standard cost card will become more detailed
and more relevant to a company using modern manufacturing techniques.
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