Traditional Absorption Method VS. Modern Production

Traditional Absorption Method VS. Modern Production

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The traditional apportionment and absorption methods

  • Labour Intensive
  • Low levels of overhead compared to the direct cost
  • A relatively non – competitive and local markets

The characteristics of the modern production environment, however, are quite different:

  • Capital intensive and machine paced environment
  • A higher level of overhead compared to direct costs
  • A higher competitive global market

 

Throughput accounting is a modern approach and an alternative approach to marginal costing. Throughput accounting is an approach that concentrates attention on time spent in production or service facilities.

Throughput accounting differentiates between fixed and variable costs in the same way that a system of marginal costing does. However, there is an argument that only a very limited number of costs are actually variable in the short run.

Taxation often has a significant effect on decision-making; taxation can reduce the net cash inflows from a project and therefore reduce its attraction to a company. Some countries are particularly attractive because of the tax incentives, for example, the benefits of taxation can outweigh operating costs.

In general, the tax rule for the recognition of income and expenses are the same as the general principles of financial accounting. However, in most countries, the tax rules for depreciation are different from those for financial accounting

 The traditional method of stock control, purchasing, production planning, product mix decision making, quality control and management are simply not suitable for a modern manufacturing environment.

Strategic management accounting aims to provide relevant information to an organisation’s management to enable them to make strategic management plans and strategic decisions.

Strategic management accounting has a positive role in supporting the financial needs of management in their task of directing and controlling the business in the best interest of its owners and other stakeholders.

 ABC was initially represented as a new way to establish a more accurate product cost. However, ABC research has entered a second phase where it became known as (ABM) activity based management. The activity-based management can perhaps be seen as a logical development of activity-based costing, in which it now focuses on the management of indirect activities, at various levels beyond direct activity or production, in order to receive the value by the customer and the profits achieved by providing this value. ABM, however, continues to reflect on ABC as its major technical accounting basis.

Conventional product costing system is based on a two-stage procedure, first the consumption of direct resources is traced to a product and cost centres, in the second stage indirect cost are allocated to products by methods such as direct labour hours, machine hours or material consumption. In a complex, multi-product environment, the allocation of such indirect cost could be significantly improved, therefore leading to a reduction in the distortion in product cost calculation, if an ABC system was adopted.

ABC is based on a two-stage procedure. However overhead cost is first charged to cost pools, based on the activities seen as causing such cost. Then these costs are attached to product lines by using cost drivers which reflect the way in which each particular product line draws on the activity whose cost is collected in the particular cost pool.

In term of looking at contracts this is a legal agreement that sets out the terms and conditions incorporated in a business, for example, a contract can be drawn when two partners are entering into a business agreement perhaps with a 50/50 share of the ownership in the business.

Businesses draw up contracts to have a set agreement on a policy or rules which are set between the owners of the business, any form of contract or agreement is a legal binding document. Many individuals and business would approach a professional in that field, for example, a solicitors firm to have the agreement drawn up between the parties or people involved in the agreement.

A business contract or agreement may set out the clauses which the parties will need to abide by, it may also set the percentage of ownership and equity between each partner.

The contract can be terminated or amended subject to the authorisation of all parties involved in the agreement as and when required.

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