Throughput Accounting Assumption

Throughput Accounting Assumption

1.    Labour is not Variable cost

Throughput says that labour is normally paid weekly and monthly and therefore it is not appropriate to categories them with level of activity (production), rather it is a fixed cost.

2.    Direct Material only variable cost

Throughput says that direct martial is only the variable production cost. This cost is treated as investment in business.

3.    Inventory is Investment

Inventory is treated as investment till it is sold. It is believed that funds have been invested in inventory and would be realized on its sale.

4.    All Expenditure are Operating (other than material)

All production expenditure is treated as operating expenditure including labour expenditure.

5.    Inventory Valuation

Only purchase cost of material is investment, no other cost is added to the value of material till it is sold (other cost are added at time of sale).

ABC Costing Assumptions

ABC Costing Assumptions

ABC costing assumption may be explained in terms of change cost structure, large overheads cost, many new costs.

1.    Change of Cost Structure

ABC costing first assumption is change in cost structure of modern organizations.      The cost structure of organizations has changed. Typical cost structure main element i.e. direct labor does not form a major product costs any more.

2.    Large Overhead Cost

ABC costing second assumption is large overheads cost in modern organizations. In new cost structure, overheads cost are more than direct cost (labour & material).

3.    Many New Costs Emerged

ABC costing third assumption is emergence of new costs in production processes. Many of these costs do not relate to production activities like quality assurance cost or material handling cost. Therefore it is not appropriate to absorb these costs using production absorption rate.

4.    Old Absorption method is not representative

Old Absorbing method of overheads allocation may not be representative of actual cost incurred in the change scenario. There is need of more accurate allocation of cost. Therefore new absorption methods are required.