Throughput accounting
We are concerned with decision making in the short run under conditions with certainty with a single limiting factor.SHORT AND LONG TERM DECISIONSDecisions taken by management may affect the future of the business in the long term, short term or both.Factors which are relevant in the short term may be irrelevant in the long run and vice-versa, but in evaluating the factors which are quantitative and qualitative, only the revenues and costs which are affected by the decision are relevant.In the short term, fixed costs remain fixed and therefore are irrelevant for decision making. The variable cost will change with the level of activity.Factors which are not relevant to decision-making include:-SUNK COSTS:Costs which have already been incurred e.g. costs of Research by gaining information from research it makes decision making process easier but the costs are irrelevant as the decisions will not change them.BOOK VALUES AND ACCOUNTING DEPRECIATION.Both figures are determined by accounting conventions. Only economic considerations are relevant in decision making.COMMON COSTSCosts which are common to all alternative course of action are irrelevant to decision-making.TYPES OF DECISIONMake or Buy a component.Decision-Rule:Make a component if the variable manufacturing costs are lower than the purchase price from and outside supplier.i.e.1. MAKE V/S BUY Direct material -£ 42 £ 170Direct Labour £ 29Direct Expenses £ 40Variable overheads £ 38Fixed overhead £ 60 £ 209Thus the irrelevant cost e.g. fixed cost £ 60 will not be taken into consideration and therefore the total relevant costs will be £ 149. Here, by making the product, the company will achieve higher contribution.ACCEPT V REJECTAccept or reject a special order.Special order is one -off order for a particular customer and is usually not repeated. £SALES 3000LESSDirect Labour 900Direct material 800Direct Expenses 30Variable