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What does Direct Material Cost refer to in a THROUGHPUT ACCOUNTING environment?
Is it the period’s Material Purchases or the Cost of Goods Sold for the period?The reason I’m asking this is I’ve stumbled on a past question (“OWL”) where apart from Sales
figures for the folowing elements are also provided:Opening Stock of Materials
Direct Materials Purchases
Closing Stock of MaterialsShould I use Sales – Direct Material Purchases or
Sales – Cost of Goods Sold
where Cost of Good Sold = Opening Stock + Purchases – Closing StockBRGDS
You should really use purchases. You certainly would not cost of goods sold because this would include labour etc..
Strictly, throughput accounting assumes that the company operates on a JIT basis and holds minimum inventory of materials, so that the materials used will equal the materials purchased.
Thanks for your response!
I understand that all other costs apart from Materials, that is Labour, Variable and Fixed Production Overheads etc are treated as fixed costs in Throughput Accounting, at least in the short-term. What puzzles me though is that the figures I mentioned earlier i.e.
Opening Stock
Purchases and
Closing Stockare directly extracted from the Inventory of Materials, that is they do not include any labour costs or any other kind of costs apart from materials.
Furthermore, all relevant questions I’ve looked at, they all make use of Standard Costs Cards for the products and these cards refer to Direct Materials used in the production; not purchases for that period.
I suppose it is assumed that material purchases = materials used as you also mention.
I am unable to understand though how we should treat a case where there are actually some inventory levels.
THANKS A LOT
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