Adding throughput contribution to the direct material cost of goods sold calculates _________?
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Answer: B. revenues
Explanation
Revenues are calculated by adding throughput contribution to the direct material cost of goods sold. Under throughput costing, all operating costs except direct materials are treated as period expenses. Therefore, total revenue equals direct material costs plus the throughput contribution generated. Throughput costing is an extreme form of variable costing used in theory of constraints applications. It treats labor and overhead as fixed costs of running the facility. Only direct materials are considered truly variable with production volume.
Firms utilizing the theory of constraints rely on throughput accounting to maximize bottleneck productivity. This approach discourages excessive inventory accumulation by expensing conversion costs immediately. It focuses managerial attention on throughput contribution. Indirect material represents supplies not directly traced to units, excluded from direct material cost calculations. Expenses represent costs incurred rather than revenue generation. Direct material is only a component rather than the sum of revenues.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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