There are two topicschoose one of them - Coursework Example

The authors, Carter and Usry (2002), define cost drivers as factors that cause the expense to happen or any factor that is identified with the event of an expense. Examples of cost drivers include machine hours, direct material hours, direct labor hours and so forth. The process of selecting the system most suitable for a business depends on having a clear comprehension of the benefits and limitations of the two primary costing systems. Also known as the conventional method, the traditional costing framework assigns manufacturing overhead costs to the manufactured products.

This method assigns a factory’s indirect costs to the manufactured items on the basis of the volume of units produced, the direct labor hours, or the production machine hours. Therefore, with a traditional costing system the implication is that factory overhead costs are dependent on a given cost driver. The application of this assumption was applicable in the past decades because the listed cost drivers were the biggest contributors to manufacturing costs of products. However, in modern times manufacturing overheads have been driven by numerous factors hence the traditional costing system may be misleading in making effective management decisions (Cokins, 1998).

Traditional costing systems apply indirect costs to the products by considering a predetermined overhead rate. The process of traditional costing begins with the identification and selection of the indirect costs and estimation of the expenses for the suitable period. The expense period can be monthly, quarterly, or yearly. The cost drivers that relate to the selected costs are then chosen. Similar to the expenses, the amount of the cost driver is evaluated for the suitable period. The estimated cost drivers and estimated expenses are then used to calculate an overhead rate that is then applied to the products using the figured rate.

The conventional