Critique of Traditional Methods of Cost Accounting
Introduction | Traditional Approach to Assigning Overheads | Critique of Traditional Methods of Cost Accounting | Activity-Based Costing | Steps in Activity-Based Costing | Critique of Activity-Based Costing
The traditional approach to assigning and attaching indirect costs may also be criticised for the following reasons:
- The direct costs of producing goods or services may be only a small fraction of the total costs of the company, while overheads can be substantial. This is particularly true in a service industry, such as education.
- The traditional approach focuses attention on the costs of direct labour, which is the basis for attaching overheads. As a way of reducing costs, managers may decide to reduce direct labour costs by outsourcing some parts of the production process, such as the printing of study materials. However, this is likely to increase indirect costs as more staff will be required to liaise with suppliers, as well as to evaluate and supervise outsourcing contracts.
- The level of overheads can be driven by management decisions that are unrelated to the demands of production. For example, senior managers may decide to redecorate executive offices in order to improve the company’s corporate image. The costs of this redecoration must be recouped through the prices charged for the company’s products even though the production department received no benefit from this expenditure.