Car Manufacturing and Costing in the UK in 1930 and 2000 - Essay Example

A volume-based costing system is a costing system that assigns overheads to products based on the output level achieved. (Blocher et al, 2005). Overhead or indirect costs are arbitrarily assigned to products based on either labor or machine hours rather than based on the product's demand for activities and thus resources. (Blocher et al). A VA volume-based costing system allocates costs to products using arbitrary methods such as direct labor hours. These systems have proven to be appropriate when manufacturing systems used to be labor-intensive when labor used to be the principal value-adding activity in the raw material conversion process.

(Cooper and Kaplan, 1992). However, with the advent of sophisticated technological developments and automation of manufacturing processes, direct labor is no longer directly working in the conversion of materials to products. Instead, labor is simply engaged in setting up machines and supervising production activities (Kaplan and Cooper, 1992). Under the volume-based costing system products that are manufactured in low quantities tend to incur more costs than those that are produced in large batches.

The costs incurred per unit on these low-volume products are usually higher than those for high-volume products. (Kaplan and Cooper, 1992). Therefore, when a volume-based costing system is used to allocate overhead costs to products both low- and high-volume products are allocated equal amounts of costs. (Kaplan and Cooper, 1992). Activity-based costing (ABC) a cost accounting system that recognizes the fact that costs are incurred by each activity that takes place within the organization and that products (or customers) should bear costs in proportion to their demand for activities (Owe and Law, 1999) is the costing system that was used in the UK car manufacturing industry in the year 2000.

This is so because car manufacturing in the year 2000 became computerized and the role of labor in manufacturing was mainly supervisory. Apportioning overheads using labor or machine hours while appropriate in the 1930s could not be appropriate in 2000. ABC was proposed by Professor Johnson.