Accounting is one of the most important pillars of business. Accounting is also called the “the language of business” because it gives helpful information to investors, businessmen, owners and managers to assess the performance of any company or business. According to one of the most successful investors in the world Warren Buffet, “the best way to prepare to be an investor is to learn all the accounting you can”.
It is important to keep records of expenses and revenues through using different systems and methods of accounting. There is a continuous change going in accounting systems and methods. It is really easy to collect numbers and save them, but the difficult part is to interpret those numbers in a meaningful way and to convey those findings to others so that they can understand easily. It is impossible in today’s world to run a business with accounting.
In most of the companies accounting systems and methods follow managerial accounting. Company’s where assembly line is installed, mostly use traditional accounting. Traditional accounting has a different cost system which accounts labor into direct and indirect. Traditional accounting is very handy for small businesses and those which do not require custom design accounting.
However, the modern world is not relying on labor and machines that are not running 24 hours a day to produce better results. Instead of that businesses are relying on technological changes and fast inventory turnover for better results. Businesses, where machines are heavily used for the greater amount of time, find it hard to use traditional accounting to keep records for costs and revenues.
Companies usually face problems in traditional accounting in recording the performance measure and keeping pace with other competitors; businesses are changing their accounting systems with changing practices. Businesses are becoming more particular and leaner nowadays. For more accurate results for decision makers “lean accounting” has been adopted by the businesses.
In traditional accounting system, the cost is apportioned to manufacturing overhead (includes indirect manufacturing cost also) to units produced. The cost of a product is calculated by adding the direct material and direct labor cost which is termed as ‘prime cost’ Unit produced is the foundation for charging the overhead cost for a product. While calculating the cost of a product, administration cost is not included in indirect labor cost of a product.
One of the biggest disadvantages companies face using traditional accounting system is the use of direct labor hours to get the cost of goods sold (COGS). Nowadays the world is going too fast and is changing at a rapid pace, so it also changes the environment of industries, machines have taken the place for humans and the need for humans has been decreased up to large extent. This is one of the main reasons that traditional accounting system is getting obsolete from the companies because it does not charge or take into consideration machine hours and its cost for producing a product.