ABSTRACT
In traditional accounting systems, costs of production such as design, transportation, marketing, sales, engineering, worker compensation premiums, and health and safety, are considered an overhead (fixed) cost and are allocated, during the annual budget process, on the basis of total units produced, production floor area utilized, or some similar fixed arbitrary unit. Therefore, the actual variable production costs of an individual product or process cannot be accurately captured. As a result, overhead costs can end up being five to ten times that of direct labour costs. Hence, one particular production unit may have overhead costs several times greater than other units in the organization, but this discrepancy would be unrecognizable, and would understate actual total costs in that unit, but spread additional overhead costs onto other units.
