Cost Accounting Systems and Cost Classification 11

	management
	Accounting: Accounting systems & Cost classification

New ideas on cost classification

The shift of costs from direct to indirect categories, and from manufacturing to non-manufacturing (design, marketing, distribution etc.) experienced by companies responding to the current competitive and technological environment reflects a shift away from mass production of standard products to increasing diversity in product ranges and rapid product development and innovation. In mass production environments costs were driven by production volume. Long production runs allowed batch sizes to be large. Slow new product development cycles allowed design costs to be spread over many years of production, and changes in products and production facilities were infrequent. Now, costs are increasingly driven by complexity and change supporting increased production 'scope' rather than volume.

Production runs are shorter and batch sizes are smaller. Set-ups are more frequent and changes in products and production methods are more frequent. Design costs are spread over short product lives, and marketing and distribution costs are increasingly important.

These changes have reduced the value of traditional cost classifications in modern manufacturing environments for managerial decision-making purposes (although they remain the basis of financial reporting stock valuation). An alternative classification basis has recently been suggested which seeks to trace costs as directly as possible to the levels of activity which they support, while avoiding arbitrary allocations.