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Traditional manufacturing costing system
The allocation of manufacturing overhead costs to the products manufactured is referred to traditional manufacturing costing. The traditional method (also known as the conventional method) assigns or allocates the factory’s indirect costs to the items manufactured on the basis of volume such as the number of how much units are produced, hours by direct labours, or machine hours used for production.
Only machine hours can’t be used to allocate the manufacturing overhead to products, it implies that the machine hours are the underlying cause of the factory overhead. Traditionally, that may have been sensible or at least satisfactory for the company’s external financial statements. But for the past few decades the manufacturing overhead has been driven or caused by many other factors. In lot of cases few customers are likely to insist additional manufacturing operations for their different products. Other customers simply want great quantities of uniform products.
Traditional manufacturing costing is inadequate when a manufacturer wants to know the true cost to produce specific products for specific customers. To overcome the shortcomings of the traditional method activity based costing (ABC) was developed. Instead of just one cost driver such as machine hours activity based costing will use many cost drivers to allocate a manufacturer’s indirect costs.
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