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Hi,
What does this mean?
“Work in progress should be VALUED AT MATERIAL COST only until output is eventually sold”And also, how does reducing the cost of spare capacity improve throughput accounting ratio? What does spare capacity means?
When a company makes there own goods, then the cost of the finished goods is the materials used, plus the labour and overheads of making them. Work-in-progress is only part finished and will only have had some of the labour and overhead work done. The statement is saying that it would be valued just at the material costs and none of the labour and overheads should be included.
Spare capacity is where they are capable of producing more than they are actually producing. Reducing the cost reduces the factory cost per hour which improves the TPAR.
Thank you!
Why labour and overheads shouldn’t be included in the work in progress?
Because throughput accounting treats them as being a fixed cost in the short term.
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