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3 concepts for Throughput Accounting under JIT environment

(a) Concept 1

In the short run, most costs in the factory (except material costs) are fixed. These fixed costs include direct labor. It is useful to group all these costs together as Total Factory Costs (TFC).

(b) Concept 2

In a JIT environment, all inventory is a 'peril' and the ideal inventory level is zero. Products should not be manufactured unless a customer has ordered. When goods are manufactured, the factory effectively operates at the rate of the slowest process, and there will be unavoidable idle capacity in other operations. Work in progress should be valued at material cost only until the output is eventually sold, so that no value will be added and no profit earned until the sale takes place. Working on output just to add to work in progress or finished goods inventory creates no profit, and so should not be encouraged.

(c) Concept 3

Profitability is measured by the rate at which 'money comes in' and, in a JIT environment, this depends on how quickly goods can be produced to satisfy customer orders. Since the goal of a profit-orientated organization is to make money, inventory must be sold for that goal to be achieved. The bottleneck resource slows the process of making money.
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