ABSTRACT

The practice of unitizing manufacturing overhead as a product cost along with variable cost. A quick overview of absorption product costing and variable product costing is necessary to begin to see the pitfalls in traditional product costing that might result in making customers wait. Absorption costing refers to the inclusion of all costs associated with manufacturing a particular product in the cost base, which includes both direct costs and overhead costs. Under absorption costing, inventory values must include the related cost of materials, labor, and overhead used to produce the inventory. Most systems rely on budgeted volumes as the basis for overhead rates. To come up with the hours over which costs are to be spread, one needs estimates of demand, product mix, and capacity. Throughput Accounting is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement.