Traditional Costing

Traditional costing is a method of costing where the manufacturing overhead is related to the manufactured products on the biases of the batch produced and the volume of the products produced in that batch. The metrics that may be involved in traditional costing can be the labor hours associated with the production of the batch and the number of hours a machine worked in order to produce that batch of products. This method of cost accounting is also known as the conventional method and alternative to this method is called activity based costing. In traditional costing the indirect cost from the manufacturing unit are allocated to the products on the basis of number of products produced by the factory. The drawback of traditional costing is that it does not allocates non-manufacturing costs to the number of units produced such as it does not allocate administrative expense that occurs during production of the goods.

The advantage of traditional costing is that it is better aligned with the standards of GAAP. Another positive aspect of this costing system is that it is easy to use in production companies that have a single product line. However this costing system has a number of other drawbacks as it does not calculate the cost of activities other than manufacturing. Moreover while calculating traditional costing the direct labor cost is often used as manufacturing overhead that is not an ideal metric to determined the cost.



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