Comparing Inventory Costing Methods

Learning Objective 4 Differentiate throughput costing from variable costing and from absorption costing

Before we begin our discussion of capacity, we will look at throughput costing, a variation of variable costing, and compare the three inventory costing methods.

Throughput Costing

Some managers believe that even variable costing promotes an excessive amount of costs being inventoried. They argue that only direct materials, such as the lenses, casing, scope, and mount in the case of Stassen’s telescopes, are “truly variable” in output. Throughput costing, which is also called super-variable costing, is an extreme form of variable costing in which only direct materials costs are included in inventoriable costs. All other costs are costs of the period in which they are incurred. In particular, variable direct manufacturing labor costs and variable manufacturing overhead costs are regarded as period costs and are deducted as expenses of the period.

Exhibit 9-5 is the throughput-costing income statement for Stassen Company for 2020 and 2021. Throughput margin equals revenues minus all direct materials costs of the goods sold. Compare the operating income amounts reported in Exhibit 9-5 with those for absorption costing and variable costing:

20202021
Absorption-costing operating income$1,500,000$1,335,000
Variable-costing operating income$1,230,000$1,537,500
Throughput-costing operating income$1,050,000$1,672,500

Exhibit 9-5

Throughput Costing for Stassen Company: Telescope Product-Line Income Statements for 2020 and 2021

Screenshot of a spreadsheet shows the throughput costing for Stassen Company’s Telescope product-line Income Statements for the year 2020 and 2021.

The details of various costs depicted in the spreadsheet are as follows:

(A) Year 2020

• Revenues ($1,000 x 6,000 units): $6,000,000

• Direct materials cost of goods sold

• Beginning inventory ($110 times 0 units): 0

• Direct materials ($110 times 8,000 units): 880,000

• Cost of goods available for sale: 880,000

• Deduct ending inventory ($110 times 2,000 units): (220,000) in parenthesis

• Direct materials cost of goods sold: 660,000

• Throughput margin: 5,340,000

• Manufacturing costs (other than direct materials): 1,800,000

• Marketing costs: 2,490,000

• Operating income: $1,050,000

(B) Year 2021

• Revenues ($1,000 x 6,500 units): $6,500,000

• Direct material cost of goods sold

• Beginning inventory ($110 times 2,000 units): 220,000

• Direct materials ($110 times 5,000 units): 550,000

• Cost of goods available for sale: 770,000

• Deduct ending inventory ($110 times 500 units): (55,000) in parenthesis

• Direct materials cost of goods sold: 715,000

• Throughput margin: 5,785,000

• Manufacturing costs (other than direct materials): 1,530,000

• Marketing costs: 2,582,500

• Operating income: $1,672,500

(C) Note

• Throughput margin equals revenues minus all direct materials cost of goods sold

• Fixed manufacturing costs plus sum of [(variable manufacturing labor cost per unit and variable manufacturing overhead cost per unit) times units produced] which equals $1,080,000 plus sum of $40 and $50 times 8,000 or 5,000 units]

• Fixed marketing costs plus product of (variable marketing cost per unit and units sold) or $1,380,000 plus the product of ($185 and 6,000 or 6,500 units)

Only the $110 direct materials cost per unit is inventoriable under throughput costing, compared with $335 per unit under absorption costing and $200 per unit under variable costing. When the production quantity exceeds sales, as in 2020, throughput costing results in the largest amount of expenses in the current period’s income statement. Advocates of throughput costing say it provides managers less incentive to produce for inventory than either variable costing or, especially, absorption costing. Throughput costing is a more recent phenomenon in comparison with variable costing and absorption costing and has avid supporters, but so far it has not been widely adopted.*

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