Concepts of Throughput Accounting
In 1890s when cost accounting was introduced, labour was the greatest fraction of manufactured cost and considered as a variable cost. Very often workers did not know about the actual time of hours that they have to perform in a week when they reported for duty since the systems of time-keeping were undeveloped. Here comes the importance of throughput accounting which removes the dependence of standard cost accounting on efficiencies, particularly the labour efficiency from management practice.
What is throughput accounting?
Throughput Accounting utilizes three measures of expense and income: Throughput – it is the rate that the system yields “goal units.” While the units of goal are money for profit businesses, usually the cost of the materials (T=S-TVC) which is derived when the variable cost or TVC is deducted from the throughput or net sales. In this connection it should be noted that T exists while a sale of the service or product takes place. Producing materials which remains in a store cannot be termed as throughput and should be considered as investment. Sometimes throughput is referred as “throughput contribution” and is akin to the idea of “contribution” within marginal costing that is revenues earned from sales minus “variable” costs while “variable” being termed as per the concept of marginal costing.
Investment – it is the money locked within the system. It is money related with machinery, buildings, inventory and other liabilities and assets. Previously in TOC documentation or theory of constraints, the “I” was exchanged between “investment” and “inventory.” The appropriate term is only “investment” now. In this matter it has to be considered that TOC suggests inventory should be evaluated based on entire variable cost related with making the inventory without taking into account about the extra cost of allocations resulted from overhead.
Operating expense – it is the money which...
Please join StudyMode to read the full document