ANALOG COSTING Meaning and
Definition
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Analog costing, also referred to as traditional costing, is a method used by companies to allocate overhead costs to products or services. It is a manual and time-consuming process that relies heavily on estimations and assumptions. Analog costing is primarily based on historical data and does not take into account the complexity of modern manufacturing systems.
In analog costing, overhead costs are typically allocated to products or services using a predetermined overhead rate, which is calculated by dividing the total overhead costs by an estimated base, such as direct labor hours or machine hours. This predetermined rate is then applied to each unit of the base to determine the overhead cost for a particular product or service.
The method assumes that overhead costs are driven by a single cost driver, and therefore, all products or services are allocated the same overhead rate, irrespective of their unique characteristics or consumption of resources. This simplification often leads to distorted and inaccurate cost allocations.
Moreover, analog costing does not consider the impact of non-volume-related cost drivers or non-linear relationships between costs and activities. As a result, it can provide misleading information for decision-making purposes and hinder accurate cost control.
Despite its limitations, analog costing is still used by some companies due to its simplicity and familiarity. However, it is gradually being replaced by more advanced costing methods such as activity-based costing (ABC), which takes into account multiple cost drivers and provides a more accurate reflection of the cost structure of products or services.
Etymology of ANALOG COSTING
The term "analog costing" does not have an etymology per se, as it is a combination of two distinct words: "analog" and "costing".
1. "Analog" comes from the Greek word "analogos", meaning proportionate or according to proportion. In modern usage, "analog" refers to a system or device that represents or measures information through physical quantities or continuous variables.
2. "Costing" is a form of the verb "cost" which comes from the Old French word "coster" meaning to cost or to value. In its noun form, "costing" refers to the process of calculating or estimating the cost of something, often used in financial or managerial accounting.
Therefore, when combined, "analog costing" suggests a method or technique of estimating or calculating costs using proportional or continuous variables, as opposed to digital or discrete variables.
