Free Accounting Dissertations - However, Some Companies Exclude All The Other Expenses, Such As The Variable
However, some companies exclude all the other expenses, such as the variable selling and shipping costs, considering direct material the most significant factor. Thus, a simplified version of throughput accounting is also used. The visible difference between conventional and throughput accounting is the handling of direct labour, which is considered as a fixed cost. The variable cost nature of direct labour seems to be more a historical reminder than contemporary reality. In many companies, labour cost is, in practise, treated as a fixed cost. (Noreen et al. 1995.)
Noreen et.al (1995) cited the example where Throughput Accounting has been successfully applied also with ABC. Southwestern Ohio Steel has implemented a pricing model based on ABC and Throughput Accounting. This model has been used to analyse and justify manufacturing cycle-time improvements. (Campbell 1995).
Fritzsch (1997) argues that the essential difference between throughput accounting and ABC lies in the time horizon. ABC is recommended for strategic planning whilst, throughput accounting works better to meet short-term purposes. As the time horizons increase, the solutions produced by throughput accounting begin to look more and more like those produced by conventional cost accounting techniques. Applications of ABC in strategic planning appear to be well documented.
It must be noted that ABC and Throughput Accounting are based on differing sets of assumptions that have an implicitly different time horizon thus claims of superiority of one approach over the other should be abandoned. It is however, possible to use both approaches together to achieve appropriate results.
Some researchers claim that Throughput Accounting approach requires less data and effort than ABC. It is further argued that Throughput Accounting is easier to implement and operate; it sometimes provides insufficient information to guide management decisions. A frequent question is whether ABC is worth the cost or whether the TOC approach will be sufficient
According to Etienne du Plooy, Throughput Accounting is differentiated from all other types of costing systems because only the costs that are truly variable and identifiable to products, are allocated to the products or services produced. These costs are called Totally Variable Costs (TVC). All other costs that are not clearly variable with the quantity of products or services produced are pooled into Operating Expenses (OE). These costs which must also be recovered are not allocated to products. As Throughput is the rate at which the system generates money, and is calculated by subtracting the TVC from the selling price of products, Throughput Accounting puts the performance measures required to maximise business opportunity in place and thus enables management to take immediate corrective action when necessary.
It has been further argued by Noreen et.
Dissertations - Free Accounting Dissertations
