Introduction:
Criticisms of traditional costing techniques.
Numerous criticisms have been brought up on the practice of Traditional Costing which is explicitly Absorption Costing. It has been unsuccessful to allocate the true production cost since the fixed production costs have been allocated with minimal or limited cost driver pools and furthermore, they ignore non-manufacturing costs such as selling, distribution and administrative costs. This was due to the fact that traditional costing methods mostly rely on the arbitrary allocation of indirect costs which means that managers do not get the full picture of the total cost of a commodity hence leading to inaccurate profitability calculations.
A certain technique was adopted by the philosophy brought forward in the book “Relevance Lost”- The rise and fall of Management Accounting by Johnson and Kaplan (1987) critiquing the traditional costing system proposing that it is number of transactions involved in production that increases over heads rather than time.
Due to these insufficiencies, other methods have been established and exercised over the years. Activity Based Costing (ABC), Activity Based Budgeting (ABB) and Activity Based Management (ABM) were established in 1990’s to overcome costing inaccuracy and are exercised till date as part of the techniques in Management Accounting (MA). Cooper and Kaplan (1992) discuss and dissect these portions of Management Accounting and bring about various theories and studies