Managerial Accounting 12.10.20
Costing systems: traditional costing
Background
o Both manufacturing and service industries have experienced remarkable changes
o Management accounting plays a central role in helping firms address the new challenges
and compete effectively
o Traditional costing systems were created when manufacturing processes were labour
intensive
o Indirect overhead costs cannot be directly supplied to products so costing systems allows
us to allocate the costs to products or services
o A single company-wide overhead rate based on direct labour hours may be used to
allocate overhead to products in these labour-intensive processes
Example 1: traditional costing
o Devonshire now introduces automated machinery
o As a result, T Overheads rise from £120 to £420
o Labour time needed for Job 2 falls from 6 hours to 1 hour
Costing systems: traditional costing
Background
o Both manufacturing and service industries have experienced remarkable changes
o Management accounting plays a central role in helping firms address the new challenges
and compete effectively
o Traditional costing systems were created when manufacturing processes were labour
intensive
o Indirect overhead costs cannot be directly supplied to products so costing systems allows
us to allocate the costs to products or services
o A single company-wide overhead rate based on direct labour hours may be used to
allocate overhead to products in these labour-intensive processes
Example 1: traditional costing
o Devonshire now introduces automated machinery
o As a result, T Overheads rise from £120 to £420
o Labour time needed for Job 2 falls from 6 hours to 1 hour
