1. What are problems that Xu Ji encountered by its former traditional costing system?
The traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured. This force products to absorb all manufacturing overhead costs regardless of whether they actually consumed the costs that were allocated to them. And, traditional cost systems rely exclusively on allocation bases that are driven by the volume of production. The traditional method assigns or allocates the factory's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours but selling and administrative costs are not assigned to products.
Pros and Cons of Traditional
Advantage of using traditional-based costing is that it aligns with Generally Accepted Accounting Principles, or GAAP.
Easy implementation for companies that provide one product also is a plus.
Traditional costing is an outdated costing system in many companies because those manufacturing companies now use machines and computers for much of their production.
Computers and machines make the system outdated because it often uses direct labor hours to calculate cost. Cost is not appropriately assigned because direct labor hours is not the best cost driver to use.
Traditional costing negates other cost drivers that may contribute to the cost of an item.
Another disadvantage of solely using the traditional costing system is that it can lead to bad management decisions because it excludes certain nonmanufacturing costs.
So if Xu Ji encountered by the former traditional costing system it will conduct innacuracy of product costs because accounting was predominantly driven by external financing report purposes. Because of this innacuracy of product cost, Xu Ji’s ability to compete in pricing with its competitor to facing Chinas free market competition was become lower.