Free Accounting Dissertations - As A Result Of Tracing Operating Expenses To Products And To Unused Capacity,
As a result of tracing operating expenses to products and to unused capacity, an ABC income statement provides additional information concerning the per unit profitability of each product that a Throughput Accounting income statement alone would not provide.
Throughput Accounting has been considered as a perfect complement for many approaches such as the Theory Of Constraints and Total Quality Management (TQM). It is strongly believed that both labour and capital productivity are increased when Throughput Accounting is applied in organisations. It does not lead to inventory build-ups. It is considered more useful for management decision-making. It is closer to a cash flow concept of income and in its purest form it is based on the cash flows of transactions. It is applicable to any enterprise that has constraints. It is relatively inexpensive yet extremely effective. It consistently provides the right information for effective decision-making. It brings the organisation closer to its goal.
To explain the difference between activity based costing and throughput accounting an example has been provided: ABC takes the information used in throughput accounting and adds monetary values. ABC differs from Throughput Accounting in that it traces resource costs to activities. After resource costs have been traced to activities, one divides the activity cost (required by ABC) by the activity capacity (required by Throughput Accounting and ABC) to arrive at the activity-charging rate (required by ABC). Next, that activity-charging rate is multiplied by the quantity of the activity costs driver demanded by each product from each activity (required by Throughput Accounting and ABC). Based on the budgeted number of units produced, each activity’s budgeted production cost is compared to that activity’s budgeted capacity costs to arrive at the costs of unused capacity for that activity (expressed in financial amounts by ABC and in non-financial amounts by TOC).
Conclusion
>From the preceding paragraphs it can be concluded that Activity based costing and throughput accounting approaches can be used together to achieve the best possible results for the organisation. Despite the inherent differences in the two approaches, they are both essential management accounting techniques, which will help the managers to make sound decisions regarding the future growth of the organisation. Thus in conclusion it can be said ABC and throughput accounting are both required to achieve the long term corporate objectives and for management accountants to arrive at sound managerial decisions relating to profitability of the business.
BIBLIOGRAPHY
[1] Eliyahu M. Goldratt and Jeff Cox, The Goal, 2nd Revised Edition, North River Press, Croton-on-Hudson, N.Y.
[2] Jay S. Holmen, ABC vs.
