Throughput costing provides less incentive to produce for inventory than either variable costing or, especially, absorption costing.

Question

Quizplus · Accepted Answer

Throughput costing only considers direct materials costs and does not allocate any fixed overhead costs to the product. This means that if a company produces excess inventory, there is no benefit to the company's reported income because fixed overhead costs are not included in the product cost. In contrast, absorption costing allocates fixed overhead costs to the product, which gives companies an incentive to produce for inventory in order to absorb these costs. Variable costing also includes fixed overhead costs, but they are treated as a period expense rather than allocated to the product, so there is still some incentive to minimize inventory levels.

Throughput Costing Provides Less Incentive to Produce for Inventory Than