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  2. avatar says

    Hi, John brilliant lecture style thank you very much!
    Can I ask a question, page 16 of the notes, it says
    “In a just in time environment we should be attempting to eliminate inventories. Use of a limited resource in production of inventories should be avoided and therefore any work in progress should be valued at only the material cost”

    Does this mean that there will be no WIP element of a throughput accounting question?
    Either way, does this statement mean that throughput accounting only takes into account what resources are available after production of inventory or does it assume that a company does not produce its own inventory at all?..I guess I don’t fully understand the statement!

    Cheers

    • Profile photo of John Moffat says

      WIP calculations are certainly not relevant for F5 :-)

      The reason that throughput assumes that no inventories are held is that it is assumed that materials are the only true variable cost – i.e. that week by week we buy exactly the material that is needed week by week. If we were keeping inventories then this would not necessarily be the case – we could buy the same materials each week and have inventory left at the end of weeks with low sales, and then use it in weeks when we had high sales. It would make purchases more of a fixed cost in the short them, whereas the essence of throughput accounting is that we regard it as the only real variable cost.

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