It refers to the allocation of the manufacturing overhead to the product that is manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory’s indirect costs to the items manufactured on the basis of volumes such as the number of units produced, the direct labor hours, or the production machine hours.
Advantages of Traditional Costing
1) Easy to Apply- This method is easy to apply as it is easy for managers to trace the cost which is directly related to the product. It’s trickier to assign overhead costs to different products.
2) Ability to Distort- For companies which produce a larger quantity of few products, traditional costing could provide a good idea of the costs of manufacturing a product.
1) It proportionate all overhead to the volume of production. Many overhead costs are, however, not proportionate to volume.
2) The reason is that the splitting of cost gives inaccurate costs of products if business grows.
3) Some companies are manufacturing and selling more than single product. In such a case, these companies are forced to take decision on pricing, product mix, advertisement, sales promotion campaign, process technology etc. based on the approximate cost information.