orie_350_lecture_notes_throughput_costing_april_9_2008 -...

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ORIE 350 April 9, 2008 Throughput Costing Method The throughput costing method was introduced by Eliyahu Goldratt in his book The Goal in 1984. The book is written in the form of a novel, and figuring out the system by reading the book is rather tedious. But, the fundamentals of throughput costing are very simple. All material, labor, and overhead costs are expensed when they are incurred. Finished goods inventory has zero value. By designating direct material, direct labor and overhead as period costs, managers are able to make better short term decisions, based more upon cash flow, and less upon operating income. Many accountants (not all) agree that throughput accounting supplements but does not replace more traditional cost accounting methods. Specifically, throughput accounting supports a specific and short-term managerial view of the operation. What about GAAP? GAAP requires that conversion costs (direct labor and manufacturing overhead) be allocated to WIP and FGI. Throughput accounting, on the other hand, immediately
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