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The Significance of Different Systems of Cost Accounting

A costing system is an information system as it requires definite information like units produced and direct labor hours. Therefore, product costs as well as other information can be determined through a specified costing system methodology. Moreover, the end results are decided by the costing system which is utilized as same input data can be utilized in a variety of ways. Every cost accounting model incorporates a unique approach for utilization of data.

A costing system must offer information to facilitate the minimization of waste. Therefore, the resources needed for designing, implementation as well as maintenance of a costing system must be less as compared to the benefits obtained through the use of the system.

The traditional cost accounting system utilizes a volume-based, single cost driver. Therefore, the conventional product costing system tends to misrepresent the cost of products. In majority of cases, this kind of costing system allocates overhead expenses to the products based on their comparative utilization of direct labor. As a result, the traditional cost systems represent incorrect product costs. The underlying methodology assumes that a product causes cost/expenditure. Every time the manufacture of a unit of product takes place, expenditure is incurred. For majority of the overhead activities, the share of activity actually used by a particular product does not correspond to a single cost driver. This theory is true for majority of modern organizations where products are manufactured through a combination of technology and manpower.

The conventional cost accounting model makes use of a volume-based driver like machine hours or direct labor hours for assigning the total manufacturing overhead expenses. Moreover, a reduction in overhead costs implies that the symptoms are given the treatment and not the underlying cause. Therefore, a decrease in overhead costs might cause a decrease in quality of products as compared to a long-lasting reduction in the costs. This approach deploys a system in which the overall costs to manufacture a specified number of products are divided amidst the different products. Consequently, the utilization of this system implies that the costs incurred need to be allotted to one or the other product.

Alternately, there is one more cost accounting model, the activity based costing model which assume that activities are the principal cost objects. It assumes that costs are caused by activities. Moreover, the demand for activities is created by cost objects.