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Dear Sir
I came across a question in Kaplan’s exam kit, which totally baffled me. The question gives two figures for material, one is newly purchased material and the other is opening material used. It has ignored the opening material inventory and only used the newly purchased material in the period and its explanation is that ” throughput accounting aims to discourage inventory building,so the ratios do not take account of inventory movements”.
I do not work in the manufacturing business but does this conform with reality?
Thanks
All of the various costing techniques (throughput accounting, lifecycle costing etc..) are modern approaches that all businesses should consider. However, the extent to which they will prove useful depends on the type of business – it is up to management to decide on their approach, but they need to be aware of the techniques available to them.
For a throughput accounting approach to be useful, the business should also aim to keep minimum inventory levels (i.e. a just-in-time approach) which in itself is likely to be beneficial to the business.
many thanks for your quick reply 🙂
If a business decides to go with throughput accounting, by ignoring the opening material balance, would it not mean that the COS is not calculating correctly? I understand that in the JIT world there will be no opening and closing material balance, but in reality, this is hardly possible?
thanks for your time again.
Two things.
Firstly, throughput accounting is a way of deciding which products to produce when there is limited time available. When it comes to preparing a profit statement (which you would not be asked to do in the exam) then it will not affect the numbers used.
Secondly, it is certainly not always possible to carry no inventory at all, but most manufacturing businesses are trying to hold minimum levels of inventory – it depends very much on the type of business as to how low a level they can achieve.
I would not worry about it for the exam – in the exam JIT does not really come into the calculations.
Hi there,
Considering the problem above, we must exclude the inventory movement from our TPAR calculation, so if we have:
Sales: $28,000
Materials purchased: $13,000
Opening material inventory: $7,250
Labour costs $6,900
Overheads $4,650
No any closing inventory.Our TPAR is ($28,000-$13,000)/($6,900+ $4,650) = 1.3
However, as it stated in the book – Throughput accounting aims to DISCOURAGE inventory building, so the ratios do not take account of inventory movements.
Doesn’t it make sense, in this case, to include Opening material inventory of $7,250 in our TPAR and thereby, decrease it? That is:TPAR is ($28,000-$13,000-$7,250)/($6,900+ $4,650) = 0.67
In this case, the manager will be ENCOURAGED to decrease the amount of inventory being held, because this figure will decrease his performance indicator, i.e TPAR. Otherwise, the manager simply doesn’t care about the stock since it is ignored in his performance evaluation. Or I misunderstand the concept? Thank you in advance.
Two things.
Firstly your book is not really correct in suggesting that an aim of throughput accounting is to discourage inventory building. Throughput accounting is simply adapting the normal limiting factor approach to deciding how best to use limited capacity, accepting the reality that usually it is only the cost of materials that is likely to be variable. However, this is only going to be the case if inventories are kept to a minimum. The aim of throughput accounting is to make the best use of the limited time.
Secondly, throughput accounting is not meant as a way of measuring a managers performance, it is (again) a way of deciding how best to use the limited capacity.
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