Is traditional costing irrelevant?

  

What is traditional Costing?

Costing is any system for assigning costs to an element of a business in which one of the old methods is traditional costing. Traditional cost allocations are based on volume such as number of products manufactured, production machine hours, direct labor hours, square feet, etc. But, it is becoming more frequent that the indirect costs that require allocation are not caused by volume. In short, allocations of traditional cost are more over based on something other than the costs.

Why is it irrelevant?

If you see it is just relevant to most of the trading companies where there is only purchase and selling price and no overheads, but with manufacturing companies it is irrelevant since the overheads are charged on to the products and customers equally.

What should be done?

For knowing the true cost of any product or customer traditional costing is not the right method. Therefore activity based costing was developed to overcome the problems of traditional method. ABC will use many cost drivers instead of just one cost driver such as machine hours to allocate a manufacturer's indirect costs.

For calculation of better profits it is necessary that you shift from traditional costing to activity based costing, since maintaining the leadership title in this competitive world is very important.