Traditional full costing vs ABC /1


Long time ago, the main concern for manufacturing companies was to minimize high levels of standard costs due to massive production.

Since the beginning of 1990s, the quick development of communication systems has created the so called “global village” and pushed every company to add something particular to its products.

Differentiation, requested by people living everywhere, has modified the way of thinking about cost allocation: no matter how painstaking you are when computing direct costs for materials and blue collars, but the increasing importance of overheads, more than 50% of the total expenditures, has made managers search for the best accounting procedures in order to realize an effective allocation.

At first, traditional full costing seemed to provide the best practice.

Some real and abstract accounting entities are made up, each one related to a particular activity producing goods (direct cost centers) or services for the same goods (indirect cost centers). Every center will be charged for direct and overhead costs according to the real consumption of input (direct costs), and according to the subjective choice of a distributive key selected for the specific cause-effect relationship (overheads).

The next step involves the closing of indirect cost centers through allocation of their costs added on to direct centers: managers are again requested to choice an appropriate key.

Finally, if a direct center produces two or more goods, the last allocation will be made by splitting the total expense.

Full costing method is considered traditional because it looks at the product in a vertical way, adding costs piece after piece in conformity with organizational structure – functions of production, selling and administration.

Many financial advisors do not consider this method updated, and they think it is affected by a high degree of discretionary power related to the choice of the keys for allocation.

On the other side, the choice of a single key (or few keys) helps managers make faster their task, and everybody knows that “time is money, and money is time”!

So, traditional full costing has been considered not only a non-scientifically based method (because it is based on the personal capability of the single manager), but even a hurried way to fix problems in cost accounting.

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