What is the traditional cost?

Traditional costs is a way to predict product profitability. During the 90s. The cost of establishing an activity (ABC) was followed by the cost of each activity that took place within the company. Traditional cost -based cost techniques are key parts of business accounting within the organization.

During traditional product costs or project, potential costs are divided into direct and indirect categories. Direct costs are easily quantifiable and include, for example, the costs of raw materials and work. Costs that are not easily quantified are classified as indirect costs or overhead costs. This calculation determines the product costs per item. The direct cost of work in this equation is only an estimate. If traditional product costs means that each unit costs $ 1.00, the company will add its profits to the product. Litho product is then sold for $ 1.20, then the company can take a profit of $ 0.20 per item; If, however, they are fromHad product costs incorrect, then the company risk that earns less money than expected.

This accounting system relies on almost any arrangement of indirect costs. There is also little attention to the causes of costs and cost scattering or the difference between estimated costs and actual costs. The result of this approach may incorrectly stand an item. If the cost of the product is not exactly known, it is more difficult to predict its profitability.

The traditional cost system is sometimes considered less favorable than newer costs such as ABC and lean costs because it does not look at the cause and consequences. Other types of allocation systems look at every activity and assign it to it. By comparison, the traditional cost of luposlants all activities together and attempts to guess their total costs.

Traditional costs offer an advantage if direct costs are high. ItThere is a case of production where costs can be applied to such overheads such as material costs, labor costs and unit costs. In the second half of the 20th century, the share of direct costs against the share of indirect costs decreased, causing traditional costs to be ineffective. It is even more ineffective when used in multiple production companies.

One of the main advantages of traditional costs is its simplicity; It is easy to calculate overhead rates. This means that businesses around the world understand the traditional cost accounting system. These systems are also relatively cost -effective, making them cheaper than ABC methods.