Free Accounting Dissertations - Besides Activity Based Analysis Is Concerned With All Overhead Costs,
Besides activity based analysis is concerned with all overhead costs, including the costs of the non-factory floor functions (product design, quality control, production planning, sales order planning and customer service) and not just factory-floor overheads; thus it takes cost accounting beyond the traditional factory floor boundaries. In addition activity based costing helps in identifying the causes of increases in costs and thus it further helps in reducing costs. ABC can be used in conducting customer profitability analysis.
Despite the advantages associated with activity based costing a number of criticisms have been identified. Theorists have argued that the costs of obtaining and interpreting the new information may be time consuming activity, thus it has been suggested that activity based analysis must only be introduced when there are provisions in the organisation to manage information to use in planning and/or control decisions. Secondly, it has been criticised on the grounds that many overheads do not relate either to volume or to complexity and diversity. Severe criticisms were also raised with the underlying principle of ABC, which is that activity causes cost. Proponents of this viewpoint argue that decisions cause cost or the passage of time causes costs or that there may not be any one clear cause of cost.
Throughput accounting is an alternative to cost accounting based on Standard or Activity Based Costing (ABC) proposed by Eliyahu M. Goldratt. Throughput accounting claims to improve management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables. It has originated from the Theory of constraints.
Throughput accounting is an approach to accounting, which is largely in sympathy with the Just-In-Time philosophy. In essence, Throughput Accounting assumes that a manager has a given set of resources available. These comprise of existing buildings, capital equipment and labour force. Using these resources, purchased materials and parts must be processed to generate sales revenue. Thus, according to Goldratt and Cox (1984), given the above scenario, the most appropriate financial objective to set for doing this is the maximisation of throughput, which is defined as, sales revenue less direct material cost.
According to Noreen et. al (1995), there are three building blocks in Goldratt’s theory namely, throughput, operating expenses and assets (Goldratt 1990). and Profit is measured by throughput minus operating expenses and profitability by profits divided by assets. (Goldratt & Cox 1992.).
Managers are thus motivated to apply the theory of constraints (TOC) because it presents them with a new dimension of focusing their energies on cost reduction rather than on profit enhancement. From this perspective TOC is considered simple.
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