SmartBiz IT Research Library

To maximize profitability, companies must know the true cost of making and delivering their products and services. Traditional cost accounting, devised in a simpler era, does not satisfy that need. Then, direct costs (chiefly materials and labor) were a large percentage of total costs, so the inability to determine indirect cost allocations was not an important factor in determining what a company earned on each of its products. Today, these indirect and overhead costs represent a far greater percentage of the total; moreover, the "product" a company sells is much more likely to be a bundled with related services, muddying the cost structure still more. Consequently, how a company allocates these indirect and overhead costs is crucial to managing profitability.