The traditional cost accounting systems determine cost by adding direct material, direct labor and overhead. Direct labor is utilized as a cost driver in the determination of overhead. The purpose of this paper is to analyze changes in cost accounting and the different cost systems companies are utilizing which eliminate the profession's historical reliance on determining products cost utilizing direct labor as its main variable.
Major changes in the way business is perform in the 21st century made the utilization of direct labor as a cost driver obsolete. A study performed on 37 factories revealed that sophisticated automated equipment was increasingly replacing direct labor and in these factories direct labor accounted for only 10% of its direct sales (Garrison & Noreen, 2003). Direct labor is becoming a variable whose correlation with sales is becoming smaller as businesses continue to evolve. CPA Mike Weir mentions that traditional costing systems do not reflect costs in the various stages of production accurately nor do they provide feedback on the cost changes affecting planning and job estimates (Nash, 1999).
Accountants are starting to use different methods to calculate costs other than absorption costing (DM+DL+OH). ...Show more