the basis for its decision making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost. 1)Explain why throughput accounting might provide more relevant information in Richard’s circumstances. 2)Explain the throughput accounting approach to optimising the level of inventory and its valuation. Contrast this approach to the current system employed by Richard.
Richard Ltd makes three products, Soya, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on a single
grade of direct labour. Fifty direct employees are paid £8.00 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished and
sealed on a machine type B.
The machine hour requirements for each of the products are as follows:
Soya Milco Yoghurt
Hours per unit Hours per unit Hours per unit
Machine Type A 1.5 4.5 3.0
Machine Type B 1.0 2.5 2.0
The capacity of the available machines type A and B are 6,000 hours and 5,000 hours per month
respectively. Details of the selling prices, unit costs and monthly demand for the three products are
as follows:
Soya Milco Yoghurt
£ per unit £ per unit £ per unit
Selling price 910 1,740 1,400
Concentrate cost 220 190 160
Other direct material cost 230 110 140
Direct labour cost @ £8.00 per hour 60 480 360
Overheads 240 620 520
Profit 160 340 220
Maximum monthly demand (units) 1200 700 600
Although, Richard Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
inventories are valued in the monthly management accounts at full absorption
cost.
1)Explain why throughput accounting might provide more relevant
information in Richard’s circumstances.
2)Explain the throughput accounting approach to optimising the level of
inventory and its valuation. Contrast this approach to the current system
employed by Richard.
Throughput Accounting is the approach to calculate the contribution as per the modern method of cost management. In throughput accounting, we calculate the throughput contribution by deducting only direct material cost from selling price unlike marginal costing approach where we also deduct direct labour cost and variable overhead to calculate the contribution.
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